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Legal Aspects in the Implementation of CDM Forestry Projects Maria Socorro Z. Manguiat, Roda Verheyen, Jens Mackensen and Gerald Scholz IUCN Environmental Law Programme IUCN – The World Conservation Union Founded in 1948, The World Conservation Union brings together States, government agencies and a diverse range of non-governmental organizations in a unique world partnership: over 1000 members in all, spread across some 150 countries. As a Union, IUCN seeks to influence, encourage and assist societies throughout the world to conserve the integrity and diversity of nature and to ensure that any use of natural resources is equitable and ecologically sustainable. The World Conservation Union builds on the strengths of its members, networks and partners to enhance their capacity and to support global alliances to safeguard natural resources at local, regional and global levels. IUCN Environmental Law Programme Environmental Law Centre Godesberger Allee 108-112 53175 Bonn, Germany Tel: +49 228 269-2231 Fax: +49 228 269-2250 E-mail: [email protected] www.iucn.org/themes/law IUCN Publications Services Unit 219c Huntingdon Road Cambridge CB3 0DL, UK Tel: +44 1223 277894 Fax: +44 1223 277175 E-mail: [email protected] www.iucn.org/bookstore Legal Aspects in the Implementation of CDM Forestry Projects IUCN IUCN Environmental Policy and Law Paper No. 59

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Legal Aspects in the Implementation of

CDM Forestry Projects

Maria Socorro Z. Manguiat, Roda Verheyen, Jens Mackensen and Gerald Scholz

IUCNEnvironmental

LawProgramme

IUCN – The World Conservation Union

Founded in 1948, The World Conservation Unionbrings together States, government agencies and adiverse range of non-governmental organizations in aunique world partnership: over 1000 members in all,spread across some 150 countries.

As a Union, IUCN seeks to influence, encourageand assist societies throughout the world to conservethe integrity and diversity of nature and to ensure thatany use of natural resources is equitable andecologically sustainable.

The World Conservation Union builds on thestrengths of its members, networks and partners toenhance their capacity and to support global alliancesto safeguard natural resources at local, regional andglobal levels.

IUCN Environmental Law ProgrammeEnvironmental Law CentreGodesberger Allee 108-11253175 Bonn, GermanyTel: +49 228 269-2231Fax: +49 228 269-2250E-mail: [email protected]/themes/law

IUCN Publications Services Unit219c Huntingdon RoadCambridge CB3 0DL, UKTel: +44 1223 277894Fax: +44 1223 277175E-mail: [email protected]/bookstore

Legal A

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IUCN Environmental Policy and Law Paper No. 59

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Legal Aspects in the Implementation of

CDM Forestry Projects

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Legal Aspects in the Implementation of

CDM Forestry Projects

Maria Socorro Z. Manguiat, Roda Verheyen, Jens Mackensen and Gerald Scholz

IUCN Environmental Law Programme

IUCN Environmental Policy and Law Paper No. 59

IUCN – The World Conservation Union2005

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The designation of geographical entities in this book, and the presentation of the material, do

not imply the expression of any opinion whatsoever on the part of IUCN, GTZ or UNEP

concerning the legal status of any country, territory, or area, or of its authorities, or concerning

the delimitation of its frontiers or boundaries.

The views expressed in this publication do not necessarily reflect those of IUCN, GTZ or

UNEP.

This publication has been made possible in part by funding from GTZ and UNEP.

Published by: IUCN, Gland, Switzerland and Cambridge, UK in collaboration with GTZ

and UNEP

Copyright: © 2005 International Union for Conservation of Nature and Natural

Resources

Reproduction of this publication for educational or other non-

commercial purposes is authorized without prior written permission

from the copyright holder provided the source is fully acknowledged.

Reproduction of this publication for resale or other commercial purposes

is prohibited without prior written permission of the copyright holder.

Citation: Manguiat, Maria Socorro Z., Verheyen, Roda, Mackensen, Jens and

Scholz, Gerald. (2005). Legal Aspects in the Implementation of CDMForestry Projects. IUCN, Gland, Switzerland and Cambridge, UK. x +

70 pp.

ISBN-10: 2-8317-0903-2

ISBN-13: 978-2-8317-0903-1

Cover design by: IUCN Publications Services Unit

Cover photo: Village on the Okavango Delta (Botswana), Maria Socorro Z. Manguiat 2005

Layout by: IUCN Publications Services Unit

Produced by: IUCN Publications Services Unit

Printed by: Imprimerie Reflet

Available from: IUCN Publications Services Unit

219c Huntingdon Road, Cambridge CB3 0DL, United Kingdom

Tel: +44 1223 277894, Fax: +44 1223 277175

E-mail: [email protected]

www.iucn.org/bookstore

A catalogue of IUCN publications is also available.

The text of this book is printed on 100 % postconsumer fibre, processed chlorine free.

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Table of contents

Foreword viiMessage viiiPreface ixAcknowledgements x

I. Introduction 1

II. The context – facts and legal preconditions for CDM AR projects 51. General background to the CDM and AR activities 52. Anatomy of a CDM project – The CDM project activity cycle 93. Selected problem areas 114. Some conclusions 25

III. Previous activities: Lessons for implementing CDM AR activities 271. Relevant AIJ project experience 272. The World Bank experience 333. Learning from projects discussed in the case studies 354. Conclusions 36

IV. The development context – ODA and CDM 371. Impact of CDM AR activities on existing/planned development-related forestry

activities 372. Diversion of ODA 383. Additionality 394. The role of the CDM for development assistance and vice versa 40

V. Synthesis and discussion of country study findings 411. The many faces of additionality 412. Restriction to afforestation and reforestation 463. Appropriate legal and institutional system to approve CDM AR projects 474. Land rights issues, title to carbon and the nature of CERs 495. Social and environmental impacts and requirements to assess and substantive

standards 526. Small-scale CDM AR 55

VI. Summary findings and recommendations 591. Contextualizing recommendations: Some observations 592. Summary 613. Questions for further study 644. Final words 65

References 67International materials 67Secondary sources and other materials 69

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Annexes (on CD)

QuestionnaireThe Argentinean ExperienceThe Chilean ExperienceThe Ghanaian ExperienceThe Philippine Experience

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Foreword

The mechanisms of the Kyoto Protocol, particularly the Clean Development Mechanism

(CDM), are coming to life, and the first certified emission reductions are now being issued,

generated not surprisingly in renewable energy projects. Forestry projects, too, are gaining

increasing attention. African countries in particular feel that carbon sequestration can offer

them a chance to participate in emissions trading.

CDM afforestation and reforestation projects, commonly referred to as sink projects, have

special features compared with CDM projects in the energy or industry sector. Sink projects

usually involve large areas of lands, a circumstance which raises particular legal issues. These

issues mainly centre around land tenure, land use rights and the subsequent ownership of cer-

tificates resulting from the CDM process.

The report presented here analyses the crucial issues and serves as a guide to project

developers and policymakers in developing countries.

The four country studies conducted were very useful in the areas of land rights, access to

sequestered carbon and title rights for certified emission reductions (CERs). The studies also

helped identify how the framework regulations of the United Nations Framework Convention

on Climate Change (UNFCCC) for sink projects can be translated into national policy and

regulations.

The report includes a useful discussion about diverting official development assistance to

CDM sink projects, something that the Kyoto Protocol does not permit for any CDM projects;

these aspects may particularly benefit international donors and implementing agencies.

Finally, in recognition of the fact that laws are only a tool for policymakers, the report

points out that “common sense” solutions are a good way to address the objectives of the

CDM; they provide clear and tangible socio-economic and environmental benefits to public

participants and are politically acceptable.

I would like to congratulate all those at the various participating organizations and experts

in developing and developed countries on the excellent results and thank them for their efforts.

Dr Bernd EisenblätterManaging Director

Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH.

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Message

Among the various innovative instruments linked to the Kyoto Protocol is the Clean

Development Mechanism (CDM). It offers developed countries a chance to offset some of

their greenhouse gas emissions by funding development projects in developing countries in

areas such as renewable energy and forestry.

I was delighted to see that, during 2005 and in advance of the 11th

session of the Conference

of the Parties to the United Nations Framework Convention on Climate Change, the first two

CDM, hydroelectric, projects were approved by the mechanism’s Board. They are now in the

final lap of defining similar carbon credit rules or afforestation and reforestation schemes,

several hundred of which are in the pipeline.

These welcome developments are a clear signal that the impact of the Kyoto Protocol will

extend well beyond 2012 and a signal of continuity urgently demanded by investors in such

schemes.

It is within this context that we have this excellent book on the legal requirements for

CDM-related forestry projects which highlights work in Argentina, Chile, Ghana and the

Philippines.

It goes without saying that the legal and institutional frameworks for CDM projects, indeed

all of our work on sustainable development, need to be addressed if these efforts are to reap

the maximum harvest.

UNEP is also looking closely at how market instruments and mechanisms can help us

achieve other aims in areas such as freshwater conservation, biodiversity and land degradation

in order to better achieve the Millennium Development Goals and overcome poverty.

The information contained in this joint publication will, I hope, play an important part in

furthering the role of the CDM in delivering sustainable development and fighting climate

change.

In the future we may see other legally binding instruments aimed at stabilizing the

atmosphere linked with Kyoto or some other arrangement. I sincerely believe this study will

be as useful for tomorrow as it is for today.

Dr Klaus ToepferExecutive Director

United Nations Environment Programme (UNEP)

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Preface

The IUCN Environmental Law Programme (ELP) welcomes this publication which caps

almost two years of work by the IUCN Environmental Law Centre in the fascinating area of

the Clean Development Mechanism (CDM). In this relatively short period, the rules of the

CDM and those relating in particular to afforestation and reforestation have continued to

evolve. With this explosion of rules has arisen a need to make sure that those who will need

to use and apply these rules understand them, and fully appreciate their repercussions. It is

this need which this book tries to fill.

This publication builds on the foundation created by the IUCN-UNEP initiative “LULUCF

under the CDM” carried out in cooperation with the Food and Agriculture Organization of the

United Nations. It takes the wealth of information available on CDM and views the subject

through the lenses of legal and policy experts, but with the aim of assisting non-lawyers. The

analysis spans the breadth of international, regional and national laws, and is groundtruthed

by concrete examples taken from the four carefully-selected case studies.

The paper ends with the conclusion that despite the need to be on the lookout for legal

issues that are often intertwined with socio-economic challenges, legal reform may not be

necessary or advisable, at least not exclusively in relation to CDM afforestation and reforesta-

tion project activities. Even in the few instances when legal reform or adjustment is suggested,

the paper advocates an integrated and phased approach in looking at the challenges, using the

CDM AR as a possible entry point for exploring legal and policy reform, and emphasises that

the law must be supported by strong institutions and close coordination among those who

implement it.

The questions raised in this paper will undoubtedly be resolved as the CDM continues to

evolve. It is a testament to the authors that many of the issues initially raised when this project

was being designed have since been taken up by the CDM Executive Board. I am certain that

the analytical framework offered by this book will remain relevant for many years. It is our

hope that this book can be a small contribution to the promotion of environmentally sound and

socially acceptable CDM AR project activities, in keeping with IUCN’s vision for a just world

that values and conserves nature.

Dr Alejandro O. IzaHead, IUCN Environmental Law Programme

Director, IUCN Environmental Law Centre

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Acknowledgements

The IUCN Environmental Law Programme gratefully acknowledges the financial support

provided by GTZ (Deutsche Gesellschaft für Technische Zusammenarbeit), the German

development agency for technical cooperation and the United Nations Environment

Programme for the preparation of this publication. The authors would like to extend their

thanks to Brett Orlando for the initial conceptualization of this paper. Thanks are also due to

Stephane Lévy, Rie Watanabe and Arturo Brandt who conducted initial research for the

project. The guidance and comments of Charles Di Leva, Reinhard Wolf, Michael Dutschke

and Sergio Jauregui on earlier drafts of this publication are also much appreciated. We would

also like to express our appreciation to Juan Rodrigo Walsh and his team in Argentina, Daniel

Yaw Abaidoo from Ghana, Edmundo Claro and Dominique Herve from Chile and Ma. Cecilia

G. Dalupan from the Philippines for their interesting case studies. Finally, we would like to

thank Tiina Rajamets and Michelle Berry of the IUCN Publications Services Unit in

Cambridge, United Kingdom for preparing the document for publication, and Francine Proulx

and Micheline Legault-Alaurent of the IUCN Canada Office for making the printing arrange-

ments.

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I. Introduction

The establishment of the Clean Development Mechanism (CDM) under the Kyoto Protocol

has been greeted with mixed emotions from climate, forestry and development experts. Many

methodological and generic issues about the implementation of CDM activities and its role in

climate protection and national development remain unsolved – including the role of

afforestation and reforestation (AR) projects as a specific part of the CDM. These, due to their

nature as projects that involve land and trees, which are regulated as property, natural

resources, and components of the environment, raise particular issues, including legal issues,

that are unique to these types of activities, as opposed, for instance, to CDM energy project

activities. Given that natural resource-related projects are also a major area of activities of

official development assistance, the relationship between the latter and CDM AR also remains

somewhat opaque.

Since October 2003, the Environmental Law Centre of IUCN – The World Conservation

Union has been working with GTZ (Deutsche Gesellschaft für Technische Zusammenarbeit),

the German development agency for technical cooperation and UNEP on a project originally

entitled “Legal Aspects of Carbon”1 which focuses on these types of projects. The objective

of the project is to identify the national-level2 legal aspects arising from the implementation

of AR projects under the CDM of the Kyoto Protocol, and recommend ways in which the

parties to these types of projects can best address these legal aspects, thereby facilitating envi-

ronmentally and socially sound projects and transactions.3

As a first step, the partners undertook a brainstorming exercise to preliminarily identify

what was perceived to be the most pressing national-level legal issues relating to CDM AR

projects. We then conducted a “Needs Assessment”, asking relevant persons in the climate and

forestry, as well as in the development community for suggestions on problem areas and

issues. On this basis, we had legal consultants look at four different potential CDM host

countries (Argentina, Chile, Ghana and the Philippines), asking them to identify and discuss

how the national legal and administrative systems would deal with the various steps necessary

to implement a CDM AR project. The results of these case studies are presented as Annexes

to this paper.

1While carbon-related legal issues formed the starting point for the conception of the study, it soon became clear

that other legal issues relating to the implementation of CDM AR projects also required examination. The title

has thus been broadened to reflect this development.2

“National level” here includes subnational (state or provincial level) issues, as opposed to international or regional

level issues.3

A similar study on legal aspects has been recently undertaken by FAO: “Climate Change and the Forestry Sector:

Possible Legislative Responses for National and Sub-national Governments”, [FAO legal study] available at

ftp://ftp.fao.org/docrep/fao/007/y5647e/y5647e00.pdf. The two studies have different focuses; however, we have

tried to take into account the findings of this study.

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Legal Aspects in the Implementation of CDM Forestry Projects

This paper synthesises the findings of the case studies and discusses other important issues

that emerged during the development of this project. It has been written by a multi-discipli-

nary team led by lawyers, with a legal perspective, but is not aimed only at lawyers. More

importantly, the paper seeks to guide policy makers in host countries in designing a CDM

framework that promotes the implementation of environmentally and socially sound project

activities in the afforestation and reforestation sectors.

The project’s main findings, based on the case studies and other developments relating to the

project are as follows:

1. More attention should be given to legal issues surrounding CDM AR to ensure that

these projects will be able to reconcile development and climate aims.

2. It cannot be concluded in general that legal reform has to take place for CDM AR

projects to be soundly implemented in host countries. However, without a clear

legal framework designed to meet the specific needs of CDM AR projects, various

legal issues are most likely to complicate and increase costs of such projects.

3. In general, it is possible to avoid legal conflicts in the implementation of CDM AR

projects by carefully selecting sites over which land title and tenure are clear

(thereby avoiding conflicts over land ownership) and by fitting AR projects into the

framework of existing forestry policies and plans (thus avoiding conflicts with other

rules of domestic law and combining CDM benefits with national sustainability and

poverty reduction goals).

This paper is aimed at explaining the basis for these findings and at providing a more

detailed description of legal issues to be solved and conflicts to be avoided. A step-by-step

approach of setting the scene, identifying problem areas, and proposing responses to these

problems has been followed, as described below:

Given that this paper is also meant for others who may not be experts in international

climate change law, Chapter II provides some basics on the CDM. It focuses on the context in

which a CDM AR project takes place, discussing the factual and legal preconditions for the

design and implementation of CDM AR projects and thereby highlighting the legal issues that

need to be considered. The chapter discusses selected problem areas that the internationally-

adopted rules on CDM AR have created or left open for resolution either at international or

national level.

Acknowledging the important lessons that can be learned from earlier projects, Chapter III

focuses on relevant project experience under the “Activities Implemented Jointly” phase

under the UN Framework Convention on Climate Change (UNFCCC), the World Bank, and

other non-CDM AR projects identified in the case studies.

Chapter IV then goes on to tackle the questions relating to official development assistance

and CDM activities, discussing questions such as additionality in the face of ODA funding,

the role of CDM in ensuring high quality projects, and the extent to which ODA might be

needed to provide the framework for CDM activities.

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I. Introduction

Chapter V then provides the synthesis and discussion of the case study findings, which are

grouped into themes that mirror those raised under Chapter II and examine whether these

problem areas are being adequately dealt with at national level.

Chapter VI provides the summary findings and recommendations of the paper.

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II. The context – facts and legal preconditions for CDM AR projects

1. General background to the CDM and AR activities Essentially, the CDM allows industrialized countries with emission reduction targets under

Annex B of the Kyoto Protocol (often referred to as the “Annex I” countries) to invest in

projects in developing countries and to use the emission reductions yielded to comply with

their climate protection targets. The specific rules on the CDM operation will be provided by

the Conference of the Parties serving as the meeting of the Parties (COP/MOP) to the Kyoto

Protocol (which will meet for the first time in late November/early December 2005), but the

rules have actually already been laid down by the Conference of the Parties (COP) to the

United Nations Framework Convention on Climate Change (UNFCCC) in various Decisions,

subject to confirmation by the COP/MOP, which is not expected to alter these rules in any

significant way.

Project participants have to select an approved baseline and monitoring methodology or

develop a project-specific one, which then needs to be approved by the CDM Executive Board

(EB) (the international body in charge of supervising the CDM). In parallel, they produce a

“Project Design Document” (PDD) that explains and assesses the planned activity according

to a given scheme and applying the methodology in practice. The PDD and methodology are

then submitted to the “Designated National Authority” (DNA, which is the new domestic

institution required, among other things, to implement the CDM in the host country). The

DNA will issue a letter of endorsement to confirm that the project is contributing to the host

country’s sustainable development priorities. The correct application of the methodology and

the consistency of the PDD will then be validated by the “Designated Operational Entity”

(DOE) (i.e. auditing companies and the like) and then registered by the EB. The registration

is the prerequisite for a project to actually produce marketable emission reductions.

The Kyoto Protocol itself makes no distinction between energy-related (i.e. emission-

avoiding) and carbon sequestration or storage projects (“sinks” or “Land use, land use-change

and forestry, LULUCF”4 in climate-jargon), such as afforestation and reforestation.

4This is the official jargon as used in the UNFCCC and the Kyoto Protocol. Under Article 3.3 of the Kyoto

Protocol, afforestation, reforestation and deforestation activities that started on or after 1 January 1990 and before

31 December 2012 are the only LULUCF activities that can be used by an Annex I Party to meet its greenhouse

gas reduction commitments. In addition, under Article 3.4 of the Kyoto Protocol, revegetation, forest

management, cropland management, and grazing land management that occurred after 1990 and are human-

induced can be accounted for by Annex I Parties in fixing their assigned amount units (AAUs). LULUCF

activities under Articles 3.3 and 3.4 of the Kyoto Protocol can be converted into removal units (RMUs) if these

activities result in a net sink. See decision 11/CP.7, land use, land-use change and forestry. AAUs and RMUs can

be used to demonstrate compliance by an Annex I Party with its quantified emission limitation and reduction

commitments under the Kyoto Protocol. See decision 19/CP.7, modalities for the accounting of assigned amounts

under Article 7, paragraph 4, of the Kyoto Protocol.

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Legal Aspects in the Implementation of CDM Forestry Projects

The interest in CDM AR activities is – from the buyer’s side – largely based on the

assumption that such projects might be able to deliver emission reductions at significantly

lower costs, in particular if compared to most national Annex I mitigation activities but also

when compared to CDM energy-related activities (e.g. efficiency improvements in existing

fossil fuel-power plants or the installation of new renewable energy capacity). At the same

time this was also the main argument against the inclusions of sinks, based on the fear that

sink options that were too cheap would impede Annex I countries from pursuing changes in

their national energy policies. For many host countries with little or no industry and only their

natural resources to depend on for revenue, CDM AR activities are the only way, apart from

receiving support for adaptation to climate change, in which they can participate in and benefit

from the flexible mechanisms, and expect to receive additional environmental benefits.

The most significant difference between CDM AR projects and energy-related CDM

projects is the temporary nature of carbon storage, the so-called non-permanence of biologi-

cally sequestered carbon. While avoided emissions in energy CDM projects will not reoccur

so easily5 and are therefore considered permanently avoided emissions, carbon stored in

biomass and soils can be re-emitted to the atmosphere through decomposition and mineraliza-

tion, fire, pests etc. This particularity of LULUCF carbon sequestration activities required

specific arrangements for the accounting of emission reductions:

While CDM energy projects produce Certified Emission Reductions (CERs), which are

tradable once they are verified, CDM AR projects generate either temporary CERs (tCERs) or

long-term CERs (lCERs). Both reflect the specific nature of temporary carbon storage through

biomass. tCERs can only be used for compliance or traded in the Kyoto Protocol commitment

period during which they were certified, hence their life-time is limited to five years,6 after

which they will have to be re-certified, which in turn increases transaction costs.

Consequently their economic attractiveness is expected to be quite limited. lCERs may be

valid up to 60 years, but re-verification is due every five years. Additionally, CERs from AR

projects may only be used for compliance up to a cap of 1% of each Annex I country’s 1990

emissions, and they are not bankable for compliance in future commitment periods.7

Both limitations have a few practical implications. tCERs and lCERs will be discounted by

market participants for two reasons: On the one hand, the inherent project risk of losing (parts

of) the carbon sequestered falls back to the credits’ owner on re-verification every five years.

On the other hand, their value is determined by the costs of replacing them with other

emission allowances after the end of the project lifetime. These may turn out to be much

higher than in the time the tCERs or lCERs were acquired. Depending on the expectations for

future carbon prices, the net present value of lCERs is unpredictable. The tCER value is

estimated at around 14–30% of the value of CERs from GHG source reduction projects.8

5“Saved” fossil fuel can be tapped any time if there is economic pressure to do so, so the avoidance cannot be

considered absolutely permanent.6

As an exception, CDM activities started between 2000 and 2008 may produce tCERs that can be counted towards

the country commitments of the first commitment period 2008–2012.7

Dutschke, Michael, Bernhard Schlamadinger et al. Value and risks of expiring carbon credits from afforestation

and reforestation projects under the CDM. (2005) Climate Policy 5(1).8 Id.

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II. The context – facts and legal preconditions for CDM AR projects

Moreover, to be eligible as a CDM project, activities must comply with several rules and

conditions, some of which are specifically applicable to AR activities. The main COP

decisions containing these rules are: decision 17/CP.79 on the general rules and modalities for

the CDM, decision 19/CP.910 on modalities for CDM AR activities, and decision 14/CP.1011

on modalities and procedures for small-scale CDM AR activities. These rules, on which the

EB issues guidelines, are applicable only at the international level, i.e. will be executed by the

Executive Board of the CDM and are preconditions for the usage of greenhouse gas emission

reductions as CERs in the context of the Kyoto Protocol.

With respect to the types of activities imaginable, three broad categories of LULUCF

projects can be distinguished: (i) emission reductions through conservation of existing carbon

stocks, (ii) carbon sequestration by the increase of carbon stocks, and (iii) substitution of fossil

fuel through sustainably grown biofuels.12 Projects for all these categories have been

implemented under the UNFCCC’s pilot phase for Activities Implemented Jointly (AIJ; see

Chapter III). However, only the second and third project categories are eligible under the

CDM for the first commitment period (2008–2012; see section 3b).

Possible types of CDM AR projects include agroforestry, monocultural or mixed industrial

plantations, forest landscape restoration projects on degraded or protected lands, community

forest projects, and other AR projects which focus on timber production, biomass energy, and

watershed management. This list shows that CDM AR activities will often be conducted to

achieve other economic, i.e. harvesting aims, which might be of importance with respect to

applicable domestic laws. For a more detailed explanation of these types of possible activities,

see Box 1.

9Contained in Doc. FCCC/CP/2001/13/Add.2.

10Contained in Doc. FCCC/CP/2003/6/Add.2. The pertinent legal text is contained in an Annex to this decision as

a draft decision for the 1st

Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol

entitled “Annex, Modalities and Procedures for afforestation and reforestation project activities under the Clean

Development Mechanism.”11

Contained in Doc. FCCC/CP/2004/10/Add.2.12

Watson, Robert T., Ian R. Noble et al. (Eds). Land Use, Land-Use Change, and Forestry: Special Report of theIntergovernmental Panel on Climate Change (Cambridge University Press, 2000) [Watson].

13Orlando, Brett et al. Carbon, Forests and People: Towards the integrated management of carbon sequestration,the environment and sustainable livelihoods (Gland, Switzerland and Cambridge, UK: IUCN, 2002) [Orlando].

Box 1. Types of AR activities

Agroforestry refers to systems of mixing agricultural or horticultural crops and/or livestockwith woody perennials. Integrating trees on farms into the wider agricultural landscape canimprove the balance between food production, poverty alleviation and environmentalmanagement. Agroforestry is practised in temperate as well as in tropical regions, inarrangements varying from simple (e.g. scattered trees in and live fences around farmland)to complex (e.g. multi-storey home gardens). It includes silvo-pastoral systems, urban agro-forestry and crop-fallow rotations. Agroforestry is attractive to small-scale farmers, who canbenefit from the income, products (fruits, vegetables, fodder, medicines, oils, nuts, fibres,fuel-wood and timber) and services (recycling of nutrients, water retention, and soilprotection) that it provides.13 According to the Intergovernmental Panel on Climate Change,

Cont.

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Box 1. Types of AR activities (cont.)

agroforestry holds the largest potential for global carbon sequestration.14 Representative seques-tration projects include the Scolel Té project in Mexico15 and AES Care project in Guatemala.16

Monocultural or mixed industrial plantations are for economic reasons quite popular indeveloped and developing countries. They require intensive technical knowledge as well assignificant up-front investments, but also feature relatively simple management schemeswhile offering competitive rates of return to invested capital. While in many casesplantations may represent an ecological deterioration compared to the natural ecosystem,they also often represent the only viable option for already highly degraded sites. Relevant sequestration projects include FACE Mt. Elgon project in Uganda or the Red Crossmangrove project in Vietnam.17

Forest landscape restoration can generate considerable environmental and socio-economicbenefits. It is a framework that builds on a number of existing rural development, conser-vation and natural resource management principles and approaches. It helps restore manyof the goods and services that enhance ecological integrity and provide tangible benefits tolocal people living in degraded or deforested landscapes. It differs from more conventionalapproaches, which tend to be limited to increasing tree cover, usually for a limited range ofgoods and services. Forest landscape restoration employs many technical approaches,including natural regeneration, tree planting and agro-forestry. In many settings, wood-lots,scrub, forest fragments and other natural vegetation can be restored to perform the mainfunctions of a forest, on which households and communities rely for their livelihoods.18

Representative projects include the Shinyanga woodland restoration project in Tanzania orthe Guaraquecaba Climate Action Project in Brazil.19

Community forestry emphasises the social dimension of forestry and its contribution tosustainable livelihoods of rural people. It includes efforts by communities to recognise andmake use of the economic, social and environmental opportunities provided by local forestresources. Technically, community forestry may include inter alia agroforestry, plantationor forest restoration measures. Community forestry projects are often, but not necessarily,small- to medium-sized.

Biomass energy projects serve the production of energy in the form of electricity, solid,liquid or gaseous fuels and heat, which is based on biomass. Biomass would refer to anyorganic matter that is available on a renewable basis and could include agricultural crops,timber and organic waste. Fire wood is a very basic, widely spread and often highlyinefficient form of biomass energy medium. Elaborated biomass energy projects includee.g. gasification of woodchips or industrial production of charcoal for purposes such as pigiron production.

14 Watson.15 Orlando.16 Watson.17 Orlando.18

See Orlando.19 Id.

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II. The context – facts and legal preconditions for CDM AR projects

The UNFCCC rules give little guidance as to how AR activities are to be implemented on

the ground. Still, these international rules, which are explained in greater detail in the

succeeding sections, provide the general legal framework in which projects can emerge as

CDM AR activities. A good understanding of them is essential to enable a host country to

appreciate its role in the CDM process and to put in place the appropriate supporting

framework for the CDM. Therefore, and before discussing some specific problem areas

relating to these international rules, a brief discussion on the anatomy of a CDM project is

presented.

2. Anatomy of a CDM project – The CDM project activitycycle20

With regard to the CDM rules formulated by the COP and subsequently, the COP/MOP and

the EB, the following steps are involved in a CDM AR project activity:21

a. AR project activity designProject participants are required to submit information on their proposed CDM AR project

activity using the PDD for afforestation and reforestation project activities, which has been

developed by the EB. A simplified PDD is available for small-scale (SSc) CDM AR project

activities.

Prior to reaching the stage of preparing a PDD, however, crucial decisions involving legal

and economic considerations are assumed to have been made regarding project participants,

the type of AR project to be implemented, including the species and varieties for planting, the

project location, and the delineation of the project boundary. Other stakeholders would have

also been identified, and an analysis or assessment of environmental and socio-economic issue

undertaken. Negotiations with project participants and other stakeholders would have

presumably taken place, and agreements entered into with them. Other permits required for

the project under national law would also have been considered and applied for, with the

timing depending on the regulations in place and how they relate, if at all, to the DNA’s cer-

tification that the project assists the host country in achieving sustainable development. Box

2 specifies some of the questions that would arise, mostly during this phase in the project

cycle. These were the kinds of questions we presented the national experts with for the country

studies, together with a general overview of the CDM project cycle.

20Information for this section was largely derived by the CDM website, http://cdm.unfccc.int

21For a more detailed analysis of the steps involved in the CDM project cycle, visit www.cdmguide.org. Also refer

to UNEP Risø’s Legal Issues Guidebook to the Clean Development Mechanism (2004).

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b. Proposal for a new AR baseline and/or monitoring methodology or theuse of an approved AR methodology

If new baseline and/or monitoring methodology are chosen, the proposed methodology,

together with the draft PDD, is submitted by the DOE to the EB for review. If the project par-

ticipants wish to use a previously approved methodology, the DOE can proceed with the

validation. For SSc CDM AR, simplified methodologies for baseline determination and

monitoring plans may be used.

c. ValidationThe DOE then evaluates the CDM AR project activity based on the requirements set out in

relevant guidelines mentioned in section 1 of this chapter.

d. RegistrationOnce the EB accepts the validation report submitted by the DOE, the CDM AR project

activity is considered registered.

e. MonitoringIn between verification periods, project participants are expected to monitor the project in

accordance with the monitoring plan that is submitted with the PDD. The results of

monitoring, which will include the measurement of the reductions in anthropogenic emissions

of greenhouse gases, will be essential to the verification work to be conducted by the DOE.

Box 2. Legal and factual preconditions for a CDM AR project activity

Most of these issues are expected to emerge at the stage of project design. Going through

this illustrative list is a useful way to evaluate whether a host country’s laws have sufficient

provisions to guide project participants in the course of the project, and to demonstrate the

breadth of issues involved:

What is the legal status of the land? Are there any particular restrictions that its

legal status imposes on the project site?

Who owns the land? Is this ownership recognised by law, and evidenced by a

legal document?

Who are the bona fide representatives of those who have a stake in the project

site? Who should the project investor be negotiating with for the CERs?

Are the occupants and/or users of the land different from those who hold legal

title to the land? What rights do the occupants and users of adjacent lands have

over the potential project site?

Does the law require the present uses of the land to be incorporated into the

project? If any land-use change is involved, does permission need to be sought

for such changes, and will the land need to be reclassified?

What other permits and clearances need to be obtained for the project, apart from

the certification that the project assists in achieving sustainable development?

Other equally important issues are discussed in subsequent sections of the paper, and some

of those that need further analysis are listed at the end of the paper.

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II. The context – facts and legal preconditions for CDM AR projects

f. VerificationThe timing of the first verification lies within the discretion of the project participants.

Afterwards, every five years, the DOE will conduct a review of the monitored variations in

net anthropogenic greenhouse gas (GHG) removals by sinks that have occurred as a result of

the CDM AR project activity since the last verification (if lCERs are chosen for accounting)

or since the project start (in the case of tCERs).

g. CertificationThe DOE then certifies that a project activity achieved the net anthropogenic GHG removals

as verified; this will be the basis of the amount of CERs to be issued by the CDM registry.

Two different DOEs are expected to conduct the validation on the one hand and the verifi-

cation and certification on the other. In the case of SSc CDM AR however, the project

proponent may use the same DOE for validation, verification and certification.

h. Issuance of CERsThe EB then authorizes the issuance of CERs that correspond with the certification provided

by the DOE, authorizing their allocation among various accounts in the CDM registry in

accordance with the agreement of the project participants. Box 3 outlines the CDM AR project

cycle in schematic form.

Box 3. CDM AR project cycle

Project

design

Validation Registration Monitoring Verification/

certification

CER

issuance

3. Selected problem areasAs indicated at the end of section 1, the UNFCCC rules provide only general guidance on how

AR CDM activities are to be implemented on the ground. Nevertheless, the international rules

are a natural starting point for identifying legal problems and options in the implementation

of CDM AR project activities in host countries. Thus, this section identifies issues dealt with

by the internationally-adopted rules which, in their application to the implementation of CDM

AR projects at the domestic level, still need to be further elaborated.22 The following

discussion served as a background to the country studies. Thus, Chapter V proposes

approaches to dealing with these problem areas based on the results of the case studies.

a. Additionality To anyone in the climate community it is well known that to qualify as a CDM activity, a

proposed project must be “additional”. The precise meaning of this term, however, is still

22There are other issues that might be of particular relevance for investors, such as baselines and methodologies that

are not dwelt on here due to the legal focus of the analysis.

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subject to debate. Decision 19/CP.9, paragraph 18 stipulates that:

“An afforestation or reforestation project activity under the CDM is additional if theactual net greenhouse gas removals by sinks are increased above the sum of thechanges in carbon stocks in the carbon pools within the project boundary that wouldhave occurred in the absence of the registered CDM afforestation or reforestationproject activity.”

In simple terms, this means that only projects that would not have happened without the extra

incentive created by the CDM component of the project can be registered as a CDM project

activity and subsequently generate CERs. This definition of additionality does not expressly

refer to legal requirements. Hypothetically, therefore, it is possible that while a certain land

use is prescribed by law, a project aimed at restoring or establishing this legally-prescribed use

would still be eligible as a CDM AR project. Such legal requirements could originate both

from environmental legislation or for example general tort principles which might apply after

a forest has been destroyed. Similarly, an existing forestry programme might require the

afforestation of a particular area – whether and under what conditions “additionality” would

still be found in such a situation is an issue we discuss in the country studies, in Chapter III

with regard to the specific case of forestry projects financed by official development

assistance (ODA) and in Chapter V in relation to the laws and policies of the countries where

the case studies were conducted.

b. Restriction to afforestation and reforestationIn theory, any “land use or land-use change and forestry (LULUCF)” activity is capable of

storing carbon, and thus, any such activity could also be the aim of a CDM project. However,

the Parties to the UNFCCC decided on a general restriction of the use of land-use credits in

the CDM at COP6bis in Bonn (July 2001) and reiterated this at COP7 in Marrakesh

(December 2001): only afforestation and reforestation are eligible to produce CERs in the first

commitment period of the Kyoto Protocol (2008–2012).23 Forest conservation activities or

activities avoiding deforestation, which would result in emission reduction through the con-

servation of existing carbon stocks, are not eligible at this time. Definitions of these terms are

provided in an Annex to decision 11/CP.7 (Land use, land-use change and forestry).24

Therefore, even if an activity might be regarded as afforestation or reforestation under, say, a

national forestry statute this activity may still not represent an eligible CDM AR activity.

23Par. 7(c), decision 17/CP.7.

24Contained in Doc. FCCC/CP/2001/13/Add.1.

“‘Afforestation’ is the direct human-induced conversion of land that has not been forested for a period of at least50 years to forested land through planting, seeding and/or the human-induced promotion of natural seedsources;” (Par. 1(b), Annex to decision 11/CP.7)“‘Reforestation’ is the direct human-induced conversion of non-forested land to forested land through planting,seeding and/or the human-induced promotion of natural seed sources, on land that was forested but that has beenconverted to non-forested land. For the first commitment period, reforestation activities will be limited to refor-estation occurring on those lands that did not contain forest on 31 December 1989.” (Par. 1(c), Annex to decision

11/CP.7)

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II. The context – facts and legal preconditions for CDM AR projects

In addition, the annex (“Definitions, modalities, rules and guidelines relating to land use,

land-use change and forestry activities under the Kyoto Protocol”) to decision 11/CP.7

includes a particular definition of the term “forest”.25 Based on this definition, a host Party

must select and thereafter report to the Executive Board through the DNA: (a) a single

minimum tree crown cover value between 10 and 30 percent; (b) a single minimum land area

value between 0.05 and 1 hectare: and (c) a single minimum tree height value between 2 and

5 metres. Such selection must be made and the choice conveyed to the EB before a non-Annex

I Party can host CDM AR projects.26 This means that, for the purpose of CDM AR, a host

country will need to choose a definition that may be entirely different from what it has used

thus far, and if this is so, then it will consequently adopt a different definition for the terms

“afforestation” and “reforestation”, since what it can consider as not being forested will

depend on the definition of the term “forest”. In host countries that have different definitions

of the term “forest” (e.g., taking into account vast differences in the landscape across the

country), such an election would also imply a choice to include particular types of forest

within the CDM AR, and to exclude others that do not fall within this definition.

Finally, CDM AR projects are only eligible on sites that were deforested before 1990. This

threshold is meant to exclude opportunities to gain from uncontrolled deforestation that might

have otherwise been spurred after the greenhouse gas emission baselines were set at 1990

levels under the Kyoto Protocol.

The definition of the term “forest” adopted by the Parties to the UNFCCC is very specific.

We were interested to determine how this definition compared to definitions in some countries

with a long tradition in forestry, and whether these differences in definition would have any

serious legal implications. We thus asked the country experts to discuss the various definitions

of forest under national law and discuss the implications of the differences in Chapter V. Their

findings do not indicate that insurmountable legal issues will arise from the definitional

differences. However, practical problems may arise, should the existing legal definitions vary

greatly from the COP-adopted definitions, since forestry-related information may only be

available for what falls under the definition of “forests” under national law.

Different legal rules might exist for each type of CDM AR project in host countries,

wittingly or unwittingly making certain types of CDM AR project activities more

difficult/easier or cheaper/more expensive to implement. These different rules were likely to

have developed independently, and perhaps even without consideration, of each other, under

different circumstances, in relation to different policies, and with varying degrees of consid-

eration, if any, for the socio-economic and environmental aspects of AR project activities.

25“‘Forest’ is a minimum area of land of 0.05-1.0 hectares with tree crown cover (or equivalent stocking level) of

more than 10–30 per cent with trees with the potential to reach a minimum height of 2–5 metres at maturity in

situ. A forest may consist either of closed forest formations where trees of various storey and undergrowth cover

a high proportion of the ground or open forest. Young natural stands and all plantations which have yet to reach

a crown density of 10-30 per cent or tree height of 2–5 metres are included under forest, as are areas normally

forming part of the forest area which are temporarily unstocked as a result of human intervention such as

harvesting or natural causes but which are expected to revert to forest.” Par. 1(a), Annex to decision 11/CP.7.26

Par. 8, Annex (modalities and procedures for afforestation and reforestation project activities under the clean

development mechanism) to decision 19/CP.9.

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With the introduction of CDM, these different project types may now all be eligible as CDM

AR project activities, but would not really be on an equal footing. It is therefore essential to

consider these differences when looking at possible barriers to implementation (including the

demonstration of project additionality) or the need for a distinct national legal framework.

Therefore, Chapter V also takes up this issue in the context of the results of the country

studies.

c. Quantitative restriction of AR creditsDecision 17/CP.7 limits the acquisition of credits from CDM AR activities by Annex I

countries to 1% of the country’s base year emissions27 and thus ~424 million tonnes of carbon

over the five year period until 2012 for all Annex I Parties excluding the USA. In addition, the

European Union’s “Linking Directive”28 further restricts the size of the market for CERs from

afforestation and reforestation project activities. Paragraph 3(b) of Article 11a of Directive

2003/87/EC29 as amended by the “Linking Directive” provides in part that CERs from land

use, land use change and forestry cannot be used under the EU’s emissions trading scheme.

These limitations do not translate into a needs-assessment of a particular planned CDM AR

activity. Neither do they set limits on the approval of AR activities on the ground. We have

therefore not expanded on this issue in this study, while acknowledging that the limitation of

demand might influence host country decisions with regard to investment in legal reform.

d. General principles Several principles govern land use, land use change and forestry in the context of the Kyoto

Protocol as a whole (decision 11/CP.7). One of these is that “the implementation of land use,land-use change and forestry activities contributes to the conservation of biodiversity andsustainable use of natural resources.”

The legal status of this principle is unclear. Legally, one way to apply the principle is to

include it among the general principles of a host country’s CDM framework and then to link

it to the pertinent country’s definition of and criteria for ascertaining consistency with its

sustainable development goals (where they exist). Decision 17/CP.7 stipulates that it is the

host country’s right to approve a project on the grounds that it contributes to sustainable

development: Prior to registration of any project the EB is to receive “… confirmation by the

host Party that the project activity assists it in achieving sustainable development” (para

40(a)). This requirement needs to be translated into approval procedures within each national

DNA, procedures that require an assessment that the project activity assists the host country

in achieving sustainable development. The host country may decide not to have criteria for

ascertaining that a project assists it in achieving sustainable development, and instead leave

this determination to the sound judgment of a previously-named decision-making authority.

27See par. 7, decision 17/CP.7.

28Directive 2004/101/EC of the European Parliament and of the Council, amending Directive 2003/87/EC estab-

lishing a scheme for greenhouse gas emission allowance trading within the Community, in respect of the Kyoto

Protocol’s project mechanisms, 27 October 2004, Official Journal of the European Union, L 338/18, 13.11.2004.29

Establishing a scheme for greenhouse gas emission allowance trading within the Community and amending

Council Directive 96/61/EC Official Journal of the European Union, L 275/32, 25.10.2003.

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II. The context – facts and legal preconditions for CDM AR projects

Even so, if the determination is questioned, the soundness of such a decision could

presumably be measured against a set of principles, including the one quoted above. Pertinent

forestry or biodiversity laws and elements under biodiversity-related multilateral agreements

to which a host country is a Party could also be considered in testing such a decision.30

In the country studies, this issue is discussed in depth, and in Chapter V this question is

revisited in conjunction with the issue of substantive standards.

e. Appropriate legal and institutional system to approve CDM AR projectsDecision 17/CP.7 sets minimum standards for the participation of a developing country in the

CDM as a host Party. In addition to the requirements of ratifying the Kyoto Protocol,

designating a national authority (DNA) responsible for CDM activities within the government

structure, and making the election described in section 2(b) of this chapter with regard to the

forest definition, countries must have in place a procedure to approve CDM projects at the

national level.

The national approval has a threefold purpose: (i) to formally indicate that the developing

country Party wishes to participate in the specific project activity; (ii) in case it is an entity

other than the country Party itself that will participate in the project activity, to approve the

voluntary participation31 of this entity; and (iii) to confirm that the activity is consistent with

national sustainable development goals.

While this approval is a national matter, the international legal framework provides some

guidance on what should be ascertained before this approval is granted. National legal

arrangements may then be necessary to ensure consistency between the national requirements

and international prerequisites, as well as between requirements in different host countries.

30For instance, under Action 3.4.9 of the Ramsar Strategic Plan 2003–2008 (Ramsar COP Resolution VIII.25), a

Contracting Party to the Ramsar Convention must “[e]nsure that national policy responses to the implementation

of the Kyoto Protocol, including revegetation and management, afforestation and reforestation do not lead to

damage to the ecological character of wetlands.” To carry out this action, Action 4.1.4 of the same Strategic Plan

prescribes the application of the guidelines on wetland restoration adopted by Ramsar COP Resolution VIII.16,

Principles and guidelines for wetland restoration.31

Paragraph 15(a) of the Annex (Simplified modalities and procedures for small-scale afforestation and reforesta-

tion project activities under the clean development mechanism) to UNFCCC COP decision 14/CP.10 states that

before the validation report for the proposed CDM project activity is submitted to the Executive Board, the

Designated Operational Entity shall have received “written approval of voluntary participation from the

designated national authority of each Party involved, including confirmation by the host Party that the proposed

small-scale afforestation or reforestation project activity under the CDM assists it in achieving sustainable

development.” Similar language is used in paragraph 40(a) of the Annex (Modalities and procedures for a clean

development mechanism) to decision 17/CP.7, par. 23(a) of Annex II (simplified modalities and procedures for

small-scale clean development mechanism project activities) to decision 21/CP.8, and par. 15(a) of the Annex

(Modalities and procedures for afforestation and reforestation project activities under the clean development

mechanism) to decision 19/CP.9. Paragraph 33 of the Annex (Modalities and procedures for a clean development

mechanism) to decision 17/CP.7 says that “[a] Party that authorizes private and/or public entities to participate in

Article 12 project activities shall remain responsible for the fulfillment of its obligations under the Kyoto Protocol

and shall ensure that such participation is consistent with the present annex . . . (emphasis supplied).” Some

confusion is caused by the use of the term “voluntary participation”, since the term does not clearly convey the

idea that non-State entities can only participate in CDM project activities with the express authorization of the

DNA.

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For example, paragraphs 37(b) and (c) of decision 17/CP.7 require the operational entity to

validate whether comments by local stakeholders have been received and considered, and

whether an environmental impact assessment has been undertaken according to national

procedures (see below). While no particular modalities are specified for receiving and

considering comments by local stakeholders, the EB issued the following clarification at its

8th meeting:

“An invitation for comments by local stakeholders shall be made in an open andtransparent manner, in a way that facilitates comments to be received from localstakeholders and allows for a reasonable time for comments to be submitted. In thisregard, project participants shall describe a project activity in a manner whichallows the local stakeholders to understand the project activity, taking into accountconfidentiality provisions of the CDM modalities and procedures.”32

The EB has also defined who may be considered as stakeholders:

“Stakeholders may be the public, including individuals, groups or communitiesaffected, or likely to be affected, by the proposed CDM project activity or actionsleading to the implementation of such activity.”33

The DOE will presumably be looking for nationally-applied or recognised guidelines to

ensure the sufficiency of the process used for receiving and considering comments by local

stakeholders. These guidelines should, for instance, indicate how stakeholder comments are

to be invited and considered. For example, would it be sufficient, under the national law and

its applicable regulations, to simply invite written comments, and to demonstrate that the

comments have been noted, or does the law require more from project participants (e.g., the

conduct of a public hearing, demonstration that the project design document has been revised

to take stakeholder comments into account)? In addition, the DOE may wish to know what

weight, if any, stakeholder opinion would have on the issuance of the DNA’s certification.

Thus, depending on the existing national laws, the international requirement for public

comment could be implemented in very different ways.

The national approval34 given by the host country pertains to the “voluntary participation”

of the private and/or public entity in a CDM project activity and to the contribution by the

32Annex 3 (Clarifications on Validation Requirements to be Checked by a Designated Operational Entity) to the

Report of the 8th meeting of the Executive Board, 19 to 20 March 2003.33

Guidelines for Completing the Project Design Document (CDM-PDD), the Proposed New Methodology: Baseline

(CDM-NMB) and the Proposed New Methodology: Monitoring (CDM-NMM), version 03, available at

http://cdm.unfccc.int/. A corollary question is how to distinguish between the stakeholders that should participate

at the domestic level and those that should participate at the international level during the period of comment

provided under par. 40(c) of the Annex to decision 17/CP.7 (30 days from the submission of the validation report

to the Executive Board), par. 15(c) of the Annex to decision 19/CP.9 (45 days), and par. 15(d) of the Annex to

decision 14/CP.10 (30 days). All these provisions speak of Parties, stakeholders and UNFCCC accredited non-

governmental organizations.34

Hence, version 3 of the Guidelines for Completing the Project Design Document (CDM-PDD), the Proposed New

Methodology: Baseline (CDM-NMB) and the Proposed New Methodology: Monitoring (CDM-NMM) defined

the term “approval of Parties involved” in this wise:

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II. The context – facts and legal preconditions for CDM AR projects

project activity to sustainable development. With regard to “voluntary participation”, approval

could include a determination of the capacity of these persons or entities to participate in the

CDM AR project, since these entities will be participating in the CDM on behalf of the host

Party.

The participation of an Annex I Party could range from being an active participant in the

project, e.g., providing part of the capital as a direct investor or supplier of a particular

technology, to simply being a buyer of the CERs generated from the project or a lender of

capital, with no other links to the project activity, and other arrangements in between these two

ends (e.g., being a shareholder in the nationally-organized project company). A project may

also be implemented unilaterally, e.g., by the host country who, at the beginning of the project

and during its operation, does not have an identified investor for the project, or buyers of the

CERs. In the case of Annex I Parties, the government itself may participate, or multilateral

agencies may lead the way in the development of CDM AR projects, as they have in the case

of other types of CDM projects. To some extent, the choice of level of participation will

depend on nationality requirements and investment regulations existing within a host country.

Specifically, in approving voluntary participation, nationality requirements may apply, if

forest-related activities are considered nationalized sectors. National laws or regulations

would also indicate, in the case of communities and other groups, how bona fide representa-

tives can be identified. These considerations should be factored into the legal framework for

the CDM and have thus also been (in part) discussed in the country studies.

As far as contribution of the project activity to sustainable development is concerned, there

is the question of what the DNA will look at. Will it look only at the PDD, or will it require

the submission of other documents? A host country’s social policies may also incline a DNA

to examine not just the project description, but even the agreements among the project partic-

ipants, especially if some project participants are assumed to be at a disadvantage.

Strictly speaking, the DNA is not obliged to look at compliance with all other applicable

laws, rules and regulations. It appears unlikely, however, for this national approval to be

issued without a determination (made formally, i.e., as embodied in law or regulations, or

informally) that other relevant domestic laws have been complied with. This conclusion is

supported by the “Tool for the demonstration and assessment of additionality in A/R CDM

project activities” approved by the Executive Board at its 21st meeting held from 28 to 30

September 2005, which tool is explained in greater detail in section 1 of Chapter V.

“A written approval constitutes the authorization by a designated national authority (DNA) of specific entity(ies)’

participation in the specific CDM project activity. . .

The DNA of a Party involved in a proposed CDM project activity shall issue a statement including the following:

The Party has ratified the Kyoto Protocol.

The approval of voluntary participation in the proposed CDM project activity.

In case of Host Party(ies): statement that the proposed CDM project activity contributes to sustainable

development.

The written approval shall be unconditional with respect to the above. . . ”

See also, Guidelines for Completing the Simplified Project Design Document (CDM-SSC-PDD) and the Form for

Submission of Methodologies for Small-Scale CDM Project Activities (F-CDM-SSC-Subm), Annex 14 to the

Report of the Executive Board at its 20th

meeting (8 July 2004).

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Legal Aspects in the Implementation of CDM Forestry Projects

If a certain level of compliance with other applicable laws, rules and regulations is expected

by the DNA, then project participants will most likely be required to show other permits and

clearances before it issues its national approval. Still other permits and clearances may be

required before a project actually begins, and during its operations. The most appropriate

sequence for obtaining these permits, and the relationship of these permits to the certification

that a project assists in achieving sustainable development, will be determined by particular

domestic circumstances.

Nevertheless, even if a project does not comply with domestic laws it would most probably

not be possible for the EB to decline registration on this basis only, as “it is the host Party’sprerogative to confirm whether a clean development mechanism project activity assists it inachieving sustainable development.”35 However, national laws and regulations and their

enforcement will be important drivers for investment decisions.

It is unclear what effect, if any, a revocation of this national approval would have on the

registration of the project, since the national approval would be given before the validation

and registration of the CDM AR project activity. This question may remain in the realm of

the theoretical, however, since the case studies indicate that revocation of the national

approval would be unlikely. The reasons for this observation, as well as responses to other

issues raised above are found in Chapter V. We discuss other permit or approval requirements

for CDM AR project activities and the role of the status of the DNA, including whether the

DNA could become a “one stop shop”, i.e. a central permitting body for AR projects submitted

in the context of the CDM, in Chapter V.

f. Land rights issues, title to carbon and the nature of CERsIn adopting the rules for CDM AR, the Parties to the UNFCCC did not assume any particular

land right or usage regime for the lands on which AR activities are to be undertaken. Neither

did they stipulate any particular relationship of the right to land and the right to the resulting

emission reductions or removals. Judging from the experience of the “Activities Implemented

Jointly” (see section 1, Chapter III) such activities could take place both on public/communal

and private land.

On the basis of this experience, Parties could anticipate challenges with regard to legal title

and land rights in the implementation of CDM AR projects. Recognising this issue, the

pertinent PDD must include “A description of legal title to the land, rights of access to thesequestered carbon, current land tenure and land use”.36 Moreover, in determining the

baseline for a particular project activity, project partners must take into account “relevantnational or sectoral policies and circumstances such as historical land uses, practices andeconomic trends”37 (see subsequent discussion on additionality in section 1, Chapter V).

354

th

prefatory clause, decision 17/CP.7.36

Decision 19/CP.9, Appendix B “Project Design Document,” para. 2 (c).37

Decision 19/CP.9, Appendix B “Project Design Document,” para. 20 (e).

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II. The context – facts and legal preconditions for CDM AR projects

In the country studies we have dedicated a considerable section to issues of land rights and

title to carbon, as well as issues of access to the sequestered carbon. In fact, questions such as

whether the right to land and the right to the sequestered carbon can be divided, how these

rights could be legally secured or registered and how then either land or carbon might be sold

were the initial drivers for the project which has culminated in this study. In particular, the

legal nature of the sequestered carbon in the host country has not been much debated at the

international level – probably also because this would depend very much on pre-existing laws

and statutes or common law concepts in the host country.

The fact that CDM AR projects will yield marketable emission allowances, in this specific

case tCERs and lCERs (see below) also limits the usefulness of any previous experiences,

such as in the context of AIJ which, essentially, was a voluntary exercise in the eyes of inter-

national law. Therefore, some observations about this concept are warranted here to be able to

discuss its repercussions for domestic legal systems.

The CER38 represents a unit that can be credited towards an Annex I Party’s fulfilment of

its quantified emission limitation and reduction commitments (QELRCs).39 CERs are issued

by the EB, and then allocated to the respective accounts in accordance with the request of the

Parties and the project participants.40 A CER represents not only the physical presence of

carbon, but a unit of verified carbon removals computed after the application of accounting

rules that exclude removals resulting from certain enumerated factors. A CER, once issued by

the EB, can be freely sold or exchanged and is fungible with other types of credits under the

rules prescribed in decision 19/CP.7. Since the CERs arise from activities within a project site,

the assumption is that, in the absence of an agreement to the contrary, they either belong to

the owner of the project site or, in some cases, to the Government.41 The owner of the project

site may, however, choose to dispose of or transfer the CERs or the right to the CERs42 as an

exercise of the right of ownership.

38Defined as “a unit issued pursuant to Article 12 [of the Kyoto Protocol] and requirements thereunder, as well as

the relevant provisions in these modalities and procedures, and is equal to one metric tonne of carbon dioxide

equivalent, calculated using global warming potentials defined by decision 2/CP.3 or as subsequently revised in

accordance with Article 5 [of the Kyoto Protocol]”. Par. 1(b), Annex (Modalities and procedures for a clean

development mechanism) to decision 17/CP.7.39

The Kyoto Protocol seeks to take the first step in achieving the objective of the UNFCCC (stabilization of

greenhouse gas concentrations in the atmosphere) by requiring a group of Parties to the UNFCCC, listed in Annex

B to the Protocol, to collectively reduce their greenhouse gas emissions by at least 5% from 1990 levels from 2008

to 2012, known as the first commitment period. The actual emission reduction commitments of each Party vary,

as set out in Annex B, and need not be effected entirely through domestic means. The so-called flexibility

mechanisms allow an Annex B country to benefit from the emission reduction credits generated from activities

occurring outside its territory. The CDM, defined under Article 12 of the Kyoto Protocol, is the only flexibility

mechanism that allows developing country Parties to participate in this system through hosting projects that are

expected to generate certified emission reductions.40

Decision 17/CP.7.41

The latter interpretation arises from an extension of the Regalian Doctrine, under which the State is presumed to

own all land and the fruits of the land, unless it has granted the right to someone else. Although the State may

have granted ownership of the land to someone else, it may have done so without the intention of giving away all

the fruits on the land, especially those whose existence it had not contemplated at the time of the grant, e.g., the

CERs or the rights to the CERs. As demonstrated in subsequent discussions, however, this line of reasoning is

not particularly conducive to promoting investment in CDM AR.42

This right to benefit from any potential gain arising out of the conversion of the certified emission reductions in

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As already mentioned, temporary and long-term CERs (tCERs and lCERs) are subcate-

gories of CERs that have been created to take into account the temporary nature of carbon

sequestration, as opposed to carbon emissions avoidance. To date, no developing (non-Annex

I) country has defined a tCER or lCER in its national legislation or provided formally for the

possibility of registration (in parallel to the registration of land title). The temporary nature

and the limit on lCERs and tCERs that may be acquired (discussed in section 3, Chapter II)

are additional factors in determining the characterization to be given to these rights and the

advisability of enacting legislation to characterize these rights nationally. Moreover, any

system established to register ownership of tCERs and lCERs nationally, or the right to these

types of CERs, would have to weigh their relatively temporary nature against the costs to both

the owner and the State of the system of registration contemplated.

Allocation of the CERs into different accounts in the CDM registry after they have been

issued by the Executive Board assumes that there is a pre-agreed basis for the allocation of

CERs among the Parties, project participants, and in some cases, with other stakeholders. The

basis for this allocation must be rooted in national law and ideally spelled out in a specific

contract43 or arrived at through the direct application of laws on this matter.44 The contract or

law would have to address such issues as responsibility for any shortfall in expected

tCERs/lCERs and the exact consequences of shortfalls (e.g., payment of a penalty or the

purchase of equivalent credits) and conversely, rights to receive any surplus credits.

Spelling out the legal relationships evolving around the right to CERs has thus far been

largely within the domain of contracts. Exploring this issue, as well as the possible conflicts

and solutions and domestic legal responses was one of the tasks set to the country experts.

Their merits are discussed further in Chapter V.

As pointed out before, it is unlikely for CERs to be the only economic benefit arising from

a CDM AR project. For example, timber harvesting is expected to be undertaken in most

cases. Apart from timber, AR projects inherently involve other potential benefits such as fruits

from the trees and firewood. The costs of running a CDM AR project may also make it

impractical to depend solely on the revenues to be derived from CERs to cover all costs

relating to the project. It is also possible for non-CER credits to be generated from the same

project, e.g., in the case of excess removals from SSc CDM AR (see subsequent discussion in

subsection (i)). Benefit sharing and issues of ownership, which are discussed in greater detail

below, are thus unlikely to be straightforward.

a project activity to the freely-tradable CERs under the Kyoto Protocol is referred to in this paper as the right toCERs.

43Even a purely contractual agreement must be based on a definition of the right under the law of the host country

or any other law that the parties to the contract have expressly chosen to govern their agreement.44

For instance, if the owner of the land is not the same as the owner of the trees standing on the land, it is unlikely

that the CERs can be attributed only to the owner of the land or the owner of the trees. In this case, property law

would have to guide these owners in deciding on how they will divide the CERs and the right to the CERs.

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II. The context – facts and legal preconditions for CDM AR projects

g. Social and environmental impacts – Requirement to assess The Parties to the UNFCCC devoted much discussion to social and environmental impacts of

CDM AR projects, in particular because environmental and indigenous peoples’ NGOs

anticipated that large plantations would affect traditional land rights and usage and degrade

biodiversity. Therefore, decision 19/CP.9 contains a requirement to assess such impacts.

A potential CDM AR activity is only to be validated by the DOE on the basis of the PDD

and thus forwarded to the EB for registration of the project if (inter alia):

“project participants have submitted to the designated operational entity documen-tation on the analysis of the socio-economic and environmental impacts, includingimpacts on biodiversity and natural ecosystems, and impacts outside the projectboundary of the proposed afforestation or reforestation project activity under theCDM. If any negative impact is considered significant by the project participants orthe host Party, project participants have undertaken a socio-economic impactassessment and/or an environmental impact assessment in accordance with theprocedures required by the host Party. Project participants shall submit a statementthat confirms that they have undertaken such an assessment in accordance with theprocedures required by the host Party and include a description of the plannedmonitoring and remedial measures to address them;”45

This requirement is different from and stricter than the rules for non-AR CDM projects. For

small-scale non-AR CDM project activities a host country may even choose not to require an

environmental impact analysis, and a socio-economic impact analysis is not required at all.46

For non-AR CDM projects that do not fall within the definition of “small scale” found under

paragraph 6(c) of decision 17/CP.7, only an environmental impact analysis or assessment is

required, as the case may be, and no socio-economic assessment or description of remedial

measures needs to be provided.47

The abovequoted provision has an important trigger function for the application of national

law and policy to CDM AR projects. As the text refers to the procedures “required by the host

Party” and assumes that such procedures exist or will be developed in a timely manner in the

host country, no international standard for conducting socio-economic or environmental

impact assessments is required to be applied, although a host country may choose to apply

such standards voluntarily, or because it is obliged to do so under other international environ-

mental law obligations.48 We have therefore studied the conditions of relevant legislation in

host countries and the country experts have described the current practice applicable to AR

projects in particular.

45Decision 19/CP.9, para. 12(c).

46Decision 21/CP, 8, paragraph 22(e), Annex I.

47See paragraph 2(e) of Appendix B to decision 17/CP.7.

48For instance, under Article 14 of the Convention on Biological Diversity (CBD) and the Guidelines for

Incorporating Biodiversity-related Issues into Environmental Impact Assessment Legislation and/or Processes and

in Strategic Environmental Impact Assessment adopted by the CBD COP through CBD decision VI/7A.

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Legal Aspects in the Implementation of CDM Forestry Projects

It should be noted, however, that the international requirements set out for the PDD

complement and shape the way in which such assessments must be conducted:

The project design document must (“shall”) include “A description of the presentenvironmental conditions of the area including a description of climate, hydrology,soils, ecosystems, and the possible presence of rare or endangered species and theirhabitats.”49

On the environmental impacts of the project activity the following information must

be given:

“(i) Documentation on the analysis of the environmental impacts, including impactson biodiversity, natural ecosystems, and impacts outside the project boundary of theproposed afforestation or reforestation project activity under the CDM. Thisanalysis should include, where applicable, information on, inter alia, hydrology,soils, risk of fires, pests and diseases;50

And on the socio-economic impacts of the project activity the following documen-

tation is required:

“(i) Documentation on the analysis of the socio-economic impacts, includingimpacts outside the project boundary of the proposed afforestation or reforestationproject activity under the CDM. This analysis should include, where applicable,information on, inter alia, local communities, indigenous peoples, land tenure, localemployment, food production, cultural and religious sites, access to fuelwood andother forest products;51

These requirements could trigger or possibly alter and modify any existing national legal

procedures for the purpose of CDM AR projects, as the international rules talk of an analysis

in case the threshold of “significant negative impacts” is not met, and an assessment if this

criterion is triggered. As crafted, the rules also imply that an analysis would be less extensive

that an assessment. Moreover, the international rules provide that it is the project participants

or the host party who determines if “any negative impacts” are “significant”.52 No definition

of the term “significant” is given. In case the host Party Government does not intervene or has

no national standards or laws with which to judge if the negative impacts are significant, the

determination of whether the threshold has been reached appears to be the prerogative of the

project participants, as indicated above. Therefore, the country studies have looked at ways

in which this threshold could be defined and in Chapter V we discuss whether there are any

significant differences or problems relating to how the assessment or analysis is to be carried

out.

49Decision 19/CP.9, Appendix B “Project Design Document,” para. 2(b).

50Decision 19/CP.9, Appendix B “Project Design Document,” para. 2(j).

51Decision 19/CP.9, Appendix B “Project Design Document”, para. 2.

52See paragraphs 2(j) and (k) of Appendix B to decision 19/CP.9 and paragraphs 1(k) and (l) of Appendix A to

decision 14/CP.10 on small-scale CDM AR projects.

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II. The context – facts and legal preconditions for CDM AR projects

h. Social and environmental impacts – substantive standardsWith regard to substantive rules for the implementation of AR activities, the international legal

rules for CDM AR activities make no reference to any international or regional safeguards,

criteria or standards for forestry activities, such as sets provided by CIFOR (Center for

International Forestry Research), FSC (Forest Stewardship Council), the Convention on

Biological Diversity (CBD) or the World Bank Operational Policy for Forests (OP 4.36) or

Natural Habitats (OP 4.04). Even a reference to the 1992 UN Forest Principles was avoided.

Rather, decisions regarding which substantive rules to use are left entirely to the host

Government.

For example, the use of genetically modified plants or saplings is not excluded by

UNFCCC COP decisions. The choice to use or not to use genetically modified plants of

saplings is left to the host country, which is expected to evaluate their potential risks.53

Similarly, host countries are mandated to “evaluate” the risks associated with the use of

potentially invasive (non-native) species for CDM AR activities.54 The international

community thus assumes that adequate standards and processes are in place for making such

choices. While there is no direct requirement to demonstrate that such standards and processes

are available, the environmental impact analysis or assessment to be undertaken may

necessitate such risk evaluation.

Generally, decision 17/CP.7 affords powers to the COP/MOP and the EB to add to the

existing rules as they might see fit. Still the EB, without a clear mandate from the COP, cannot

reject CDM projects on substantive grounds that are not explicitly included in decision

17/CP.7, 19/CP.9 or 14/CP.10. Even if this is not stated in the Decisions, this follows from the

strong opposition of non Annex I countries against such discretion during the negotiations.

Against this “void” at the international level, the country experts analysed the standards and

criteria applicable under domestic law to potential AR projects (e.g., as elements of existing

national forestry policies), and discussed the possibility of introducing additional standards

and requirements. In Chapter V we return to this issue and explore whether and how such

standards might be needed and form an element of a specific legal framework for CDM AR

activities.

i. Small-scale AR activitiesA specific type of CDM AR projects, small-scale activities, has received special attention,

spurred in part by the concern that the market for CDM AR projects would be dominated by

industrial entities or persons with access to vast tracts of land, an observation made in several

of our case studies. Simplified modalities and procedures adopted for this special type of

CDM AR project aim both to facilitate the implementation of such projects and to simultane-

ously ensure socio-economic benefits.

53Decision 19/CP.9, preamble, para. 9. The prefatory paragraph, however, used the following vague phrase:

“Recognizing that host Parties evaluate, in accordance with their national laws, potential risks associated with the

use of genetically modified organisms by afforestation and reforestation project activities . . .”54

Decision 19/CP.9, preamble, para. 8.

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Legal Aspects in the Implementation of CDM Forestry Projects

Small-scale afforestation and reforestation activities under the CDM (SSc CDM AR) are

defined as:

“those that are expected to result in net anthropogenic greenhouse gas removals bysinks of less than 8 kilotonnes of CO2 per year and are developed or implemented bylow-income communities and individuals as determined by the host Party. If a small-scale afforestation or reforestation project activity under the CDM results in netanthropogenic greenhouse gas removals greater than 8 kilotonnes of CO2 per year,the excess removals will not be eligible for the issuance of tCERs or lCERs.”55

To confirm that a SSc CDM AR is developed or implemented by low-income communities

and individuals, a DOE must receive “a written declaration that the proposed small-scale

afforestation or reforestation project activity under the CDM is developed or implemented by

low-income communities and individuals as determined by the host Party (italics supplied).”56

Thus, while the requirement to involve low-income communities and individuals has been

imposed internationally, the determination of who falls within this category is to be made

domestically. The other question is what it means for a project activity to be “developed” or

“implemented” by these low-income communities and individuals, as there are no internation-

ally-accepted definitions for these terms in the context of the CDM. There will also be some

expectation that the simplification of modalities and procedures for SSc CDM AR at the inter-

national level will be mirrored at the national level.

Appendix B of decision 14/CP.10 lists the types of SSc CDM AR that the EB has been asked

to develop simplified baseline methodologies for, namely:

Grassland to forested land;

Cropland to forested land;

Wetland to forested land; and

Settlement to forested land.

These categories indicate possible land use conflicts that may arise from the implementa-

tion of CDM AR projects. At the time that the case studies were being undertaken, rules on

SSc CDM AR had not yet been agreed on. Hence, no questions on SSc CDM AR were

55Annex (modalities and procedures for afforestation and reforestation project activities under the clean

development mechanism) to decision 19/CP.9, modalities and procedures for afforestation and reforestation

project activities under the clean development mechanism in the first commitment period of the Kyoto Protocol.

Decision 14/CP.10 subsequently clarified the meaning of the phrase “less than 8 kilotonnes of CO2 per year”: The

8 kilotonne figure would be derived by dividing the projected net anthropogenic greenhouse gas removals by sinks

by the number of years between each verification period (par 1(b)). This threshold would be the ex ante criterion

for allowing an SSc CDM AR to benefit from the simplified modalities and procedures and from the measures to

facilitate their implementation. At the point of crediting, an ex post rule would apply, i.e., if the actual removals

exceed the projected removals of 8 kilotonnes of carbon dioxide per year, the excess removals would not be

eligible for the issuance of temporary certified emission reductions (tCERs) and long-term certified emission

reductions (lCERs; par. 1(c)). Conceivably, other types of credits not linked to the CDM could then be issued for

any excess removals.56

Par. 15(b) of the annex (simplified modalities and procedures for small-scale afforestation and reforestation

project activities under the clean development mechanism) to decision 14/CP.10.

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II. The context – facts and legal preconditions for CDM AR projects

included in the consultants’ questionnaire. This did not prevent the consultants from

discussing small-scale afforestation and reforestation project activities, demonstrating the

importance attached to such types of CDM AR project activities. The possible domestic impli-

cations of the points raised above, including these classifications, are described in Chapter V.

4. Some conclusions As demonstrated above, many legal and practical issues can arise when considering the imple-

mentation of CDM AR activities. To effectively address legal aspects on the domestic level, it

is necessary to be clear about what the international CDM rules provide and to appreciate that

the absence of international guidance in some areas is a result of a combination of a deliberate

political choice not to create rules for some issues, and of an inability to agree on some rules

because of the great variety of possible permutations at the domestic level and the impossibil-

ity of foreseeing all the ramifications of adopted policies. The overview has shown that the

international framework really only represents a framework with many gaps to fill by national

law and policy.

While many of the legal issues revolve around forestry law, land use, land tenure, environ-

mental and contractual laws and policies, other areas of the law are also brought into the

picture. Thus, in analysing possible approaches to these problem areas, the questionnaire

developed for the case studies did not immediately zero in on the specific issues outlined

above, but also explored issues such as the administrative and regulatory set-up, and the insti-

tutional and policy aspects of the forestry, land and environment sectors. The importance of

these aspects were highlighted, inter alia, by past experience and therefore, the country

experts, where appropriate, were also asked to explore lessons learned from earlier “sink”

projects in their countries and regions. While we found that there are limits to the compara-

bility, we also considered that it is worth looking afresh at former experience with AR

activities (see Chapter III) in the context of national implementation in particular.

Moreover, in designing the framework for the country studies we tried to take into account

the development assistance aspect of forestry and natural resource development, as the close

link between CDM AR projects and ongoing and planned ODA programmes cannot be in

doubt. We found that this particular relationship, which forms an additional layer to the inter-

national rules described above was quite opaque, which is why Chapter IV briefly explains the

various issues involved, in particular for the issue of additionality already discussed above as

well as other possible implications for national level implementation.

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III. Previous activities: Lessons for implementing CDM AR activities

Internationally there is so far only comparatively little project-based experience with carbon

sequestration projects. Some of these experiences are based on the AIJ projects, others mainly

from voluntary, so-called non-CDM AR projects. However, domestic schemes such as the

Social Forestry Program in India57 and some AR projects identified in the country case studies

also hold valuable lessons for future AR CDM projects.

1. Relevant AIJ project experienceThe AIJ programme was established in 199558 at the 1st session of the Conference of the Parties

to the UNFCCC. It was designed in response to the fact that Article 4.2 of the UNFCCC

explicitly allows for “joint” action to reduce emissions and enhance sinks and to enable

countries to gain experience in the field of greenhouse gas reductions “abroad”, including in

developing countries. It is now an important precursor to the project-based mechanisms in the

Kyoto Protocol (CDM and joint implementation or JI). Experiences were expected to be

gained mainly for methodological issues, such as determination of baselines, monitoring and

certification issues.59 As the subsequent discussions will show, valuable information on a

number of legal and managerial issues relevant to future CDM and JI activities can also be

obtained from AIJ projects. To date, over 150 projects have been registered under AIJ, only

10 of which incorporated significant elements of AR in their objectives.

Thirteen projects (see Table 1) have been reviewed by means of questionnaires and existing

project reports. These include 10 AIJ projects relevant to the AR sector and three additional

projects that were not registered as AIJ, but initiated with a similar purpose, i.e., to gain

experience in the area of carbon sequestration projects in developing countries under the

framework of the UNFCCC. The main areas of concern that emerged from this review related

to land use and land use change, land tenure, institutional and policy aspects in project host

countries and the social dimension in AR projects.

57The Indian Social Forestry Program, started during the 1980s, involved large-scale afforestation of communal

land which was undertaken in cooperation with the Forest Department and multilateral donors. Major lessons

learnt include (Watson): unsolved questions regarding land tenure rights between different Federal Departments

(Forestry and Revenue) and the village itself caused impediment of community project activities; community par-

ticipation was hampered or stopped by failure to define, establish, and publicize the rights for marketing and

allocating of project benefits to the community; and inappropriate equity consideration affected more than 80%

of low-status people adversely by closure of community land.58

Activities Implemented Jointly, established by decision 5/CP.1 allowed Parties to undertake emission reduction or

sequestration projects in developing countries and economies in transition. These projects were undertaken mostly

for publicity reasons, as the credits generated cannot be used against any binding emission targets of Annex I

countries. 59

FCCC/SB/1998/2, Mechanisms for Cooperative Implementation.

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Legal Aspects in the Implementation of CDM Forestry Projects

Table 1. Reviewed projects 60

aProject lifetime (in years); date initiated; investor country.

bEstimated CO2 benefits per hectare and totals for projects are generally reported by project developers, do not use

standardized or consistent GHG accounting methods, generally only report CO2 (not other GHGs), and have not

been independently reviewed. The wide range of estimates for conservation/protection projects results from the

type of activity (e.g., avoided logging or avoided deforestation) and from a large project area with only a fraction

affected by the activity per year.

Project and host country AIJ Dominant activity Projectinformation

Area (ha) Estimatedlifetime Co

2

benefits (000 t C)

EstimatedCo

2benefits

per hectare (t C ha-1)b

FACE Krkonose and SumavaNational Parks, Czech Republic

Yes Reforestationregeneration

99; 1992; TheNetherlands

14,000 2,682 191

RUSAFOR, Russian Federation Yes Afforestationplantation

49 (2 sites), 60(2 sites); 1993;USA

900 EPA,AWM

80 89

Klinki Forestry, Costa Rica Yes Agroforestry,afforestation

46; 1997; USA Phase I:100Total: 6,000

1,970 328

Costa Rica / NorwayReforestation and ForestConservation Project

Yes Reforestation (i),ForestConservation (ii)

25; 1997;Norway

1,000(i)3,000 (ii)

231 75 (i)2 - 67(ii)

Rio Bermejo CarbonSequestration Project

Yes Plantations, forestmanagement andenrichment

30; 1999; USA 70,000 4,345 15 - 147

SIF Carbon SequestrationProject

Yes Afforestation 51; 1999;Chile/USA

7,000 385 55

Commercial Reforestation inthe Chiriqui Province

Yes Reforestation 25; 1998; USA 500 16 31

Community Silviculture in theSierra Norte de Oaxaca

Yes Agroforestry,reforestation

30; - ; USA 49,027 840 -

FACE Profafor, Ecuador Yes Small farmerplantations

1993; TheNetherlands

75,000 9,660 129

Scolel Té, Mexico Yes Agroforestry,reforestation,management

30; 1997; UK,France

Phase I:50Total: 2,000within13,000

PhaseI:15Total 330

26

INFAPRO: FACE Foundation,Malaysia

No Enrichmentplanting

25 implemented,99 total; 1992;The Netherlands

14,000 3,000 170

FACE Netherlands, TheNetherlands

No Urban forestafforestation

1992; TheNetherlands

5,000 885 177

FACE Elgon/Kibale, Uganda No Forest rehabilita-tion

1994; TheNetherlands

27,000 707 26

60Sources: UNFCCC website, AIJ projects under the pilot phase, list of reported projects

(http://unfccc.int/program/coop/aij/aijproj.html); Watson, pages 298–300. See also OECD, Forestry Projects:

lessons learned and implications for CDM modalities, COM/ENV/EPOC/IEA/SLT(2003), Paris 2003.

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III. Previous activities: Lessons for implementing CDM AR activities

While the provision of sustained technical assistance, long-term commitment of all parties,

comprehensive stakeholder involvement at all project stages and the creation of financial

benefits and incentives for the partners implementing AR measures were identified as

elements for success in the reviewed projects, these AIJ projects have certain limitations

concerning their comparability to expected CDM and JI activities. Firstly, the absence of the

very core characteristic of CDM and JI, namely the generation of tradable CERs, significant-

ly distinguishes AIJ from the Kyoto mechanisms. AIJ is not a market-based mechanism. Other

major limitations relate to the different regulatory frameworks, to transparency, monitoring

and verification requirements, which are mostly absent in the AIJ framework. Although AIJ

projects were designed to meet the principal criteria of CDM and JI (to the extent these criteria

were already agreed), such as measurable and additional environmental benefits relating to the

mitigation of climate change, the rules and procedures under AIJ are generally limited and less

transparent. This is due to the fact that AIJ projects were purely voluntary and therefore often

not subjected to external assessment and auditing. For instance, the issue of transaction costs

in AIJ projects cannot provide an example for transaction costs in the CDM.61

Despite these limitations, some issues are especially relevant at the early planning stages of

CDM AR projects and can provide project managers with valuable insights. These are:

Issues of land tenure and contracts in AIJ;

Land use and land-use change in AIJ project areas;

Financial aspects of AIJ projects;

Institutional aspects and national development and environmental priorities; and

The social dimension in AIJ.

These issues are discussed below.

a. Land tenure/ownership and related contractual issuesAIJ pilot projects with an AR objective were mostly implemented in co-operation with

farmers working on small- and medium-scale farms of 10 to 100 hectares, often in subsistence

economies. The generation of employment and income as well as the restoration of degraded

land were the main direct impacts benefiting the local population. Many projects also

contributed to the conservation of natural resources, mainly soil and biodiversity. One

question is whether the choice of CDM project locations will be influenced in a similar way

to meet the social and development requirements, given the market value of t/lCERs

generated. An aspect favouring the cooperation with farmers might be that it is often not

61The described limitations are mirrored in a study of Canada’s CDM&JI Office on the potential of cost-effective

conversion of AIJ into CDM/JI. It is legally possible to convert AIJ projects that have started as early as

01.01.2000 into CDM or JI projects as long as they were not financed with official development aid. The set of

rules and procedures applicable to AIJ would need to be upgraded, specified and amended by the specific require-

ments of CDM and JI. The costs for this kind of project conversion are – with minor exceptions – prohibitive,

because the adaptation of the regulatory framework would exceed the profits expected to originate from future

CER production. Canada’s Clean Development Mechanism & Joint Implementation Office (CDM & JI Office),

2003. Study: Review of Activities Implemented Jointly (AIJ) Projects - The Potential for Cost-effective

Conversion to Joint Implementation or the Clean Development Mechanism. Prepared by Econoler International,

weblink: www.dfait-maeci.gc.ca/cdm-ji/review_aij-en.asp

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Legal Aspects in the Implementation of CDM Forestry Projects

feasible for foreign and even domestic corporations to acquire the ownership over the

extensive areas of land needed to enable substantial carbon sequestration.

Property rights of project land in the reviewed activities were mostly directly held by local

farmers or by communities. Only few projects were realized in national parks or on other

types of land that were not privately-owned.62 The typical project form in AIJ was a

cooperative venture between the Annex I country Parties, for example research centres or non-

governmental organizations, and the respective rural communities or individual farmers. In

case projects involved territory designated as a protected area, contractual agreements were

also concluded with national or local authorities of the host country.

Most reviewed contracts had a term of one timber harvest cycle, which in tropical and

subtropical regions is typically between 20 and 25 years depending on the species grown and

certain environmental conditions. After the harvest, replanting is assumed in many contracts,

even though the contract ceases at this point and all land use rights (including the rights to

use/sell the emission reductions generated) go back to the farmers. Many projects assume an

independent continuation of the measures by the farmers themselves after the positive

experiences in the first run. The Dutch FACE Foundation took a different approach by

concluding contracts with Uganda Wildlife Authority and locals running for 99 years to

legally ensure the long-term survival of projects realized in national parks.

All reviewed contracts maintained the original ownership, access rights and principally the

pre-existing right of land use. The main purpose of the agreements was the legal determina-

tion of the intended future land use during the contract term and after the contract had ended.

This was complemented by a set of obligations and specific restrictions to ensure compliance

with the objective of carbon sequestration. Plantation maintenance, replanting of seedlings

that had died off, harvest modalities, issues of risk (force majeure, i.e. in particular forest pests

and fires) and the financial details were essential components of all contracts. In some

projects, the terms of the contract were tied to the land independently of ownership to secure

the realization of the project in case of transfer of ownership.63

b. Land use and land-use change AIJ projects were generally implemented on land of marginal economical value, such as

degraded agricultural land with low or extremely low productivity, fallow land and

unimproved pasture. The main land use types implemented through the projects were refor-

estation, afforestation and agroforestry. Projects in national parks and other unused areas did

not require a conversion of the land use systems, which probably simplified and accelerated

the planning process. In those areas afforestation and enrichment plantations (plantations to

enhance the natural regeneration of forests) were implemented without any commercial

purpose but carbon offset.

62The Dutch FACE Foundation administered projects in national parks in Uganda and in the Czech Republic. The

project RUSAFOR in the Russian Federation was partly realized in protected areas.63

Report from Klinki Forestry Project, Costa Rica, and personal communication with Dr Herster Barres, project

administrator.

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III. Previous activities: Lessons for implementing CDM AR activities

Including the local population in the decision on future land uses proved to be a crucial

component to secure implementation. Without their participation in the project planning

process the successful realization of tree plantations and their maintenance would have been

put at stake.

All project measures created a variety of positive environmental effects, which were not

financially recognised. The main benefits were improvement of natural habitats, especially for

birds, a general increase of biodiversity in the project area, the restoration of degraded soils

and erosion control, all of which enhanced the value of the property.

c. Financial aspects In bi- and multilateral projects, as in the reviewed AIJ projects, investment costs and financialrisks were largely borne by the developed country parties.64 The sources of project funding

were mostly governmental or non-governmental organizations, which provided payments to

farmers (e.g. for planting and maintenance but also to cover harvesting shortfalls) usually as

grants – not as loans. This practice is not compatible with the nature of CDM as a market

mechanism, as the award of grants is not part of normal market practice.

The SIF Carbon Sequestration Project in Chile is an interesting exception in this context,

because project funding is not dependent on any non-market source.65 Financial self-sufficiency is created through a long-term bond instrument based on forest assets, which are

sold to private investors in the Chilean capital market. This source produces the cash flow

required to cover all investment costs, the expenses during the growth cycle and annual

payments to farmers. The harvest revenues are used to pay off the investors and just a

percentage goes to the farmers.

The investment by UNFCCC Annex I Parties into AIJ should be additional to their officialdevelopment assistance and other obligations made under UNFCCC66 – this criterion was also

adopted in the pertinent CDM decisions (see Chapter IV). This aspect of financial additional-

ity of AIJ projects is hardly recognised in any of the official project reports submitted to the

UNFCCC secretariat.

The aspect of transaction costs in AR projects needs to be especially considered in the

further formulation of specific modalities for small-scale CDM projects. A major issue of

concern expressed by AIJ project managers are the extensive requirements in the certification

and documentation process under the CDM, which might result in prohibitively high costs in

64One likely obstacle for unilateral CDM projects are the high initial investment costs, especially since the first

significant revenues from timber sales can not be expected to be made earlier than 15 to 25 years from the planting

date onwards. Additional maintenance costs for AR and other forms of plantations vary strongly with the selected

species and local labour costs. In total, the required investment can exceed several thousand US$ per hectare of

which the major part needs to be spent during the first 3 to 5 years. This amount exceeds by far the financial ability

of small and medium farmers and also of many national budgets assigned to forestry and environment in Non-

Annex I Parties.65

SIF Carbon Sequestration Project report, as submitted to the UNFCCC, http://unfccc.int/program/coop/aij/aijproj.html66

Par. 1 (e), decision 5/CP.1, Activities implemented jointly under the pilot phase.

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Legal Aspects in the Implementation of CDM Forestry Projects

case of projects generating just few marketable CERs. A common cost reduction measure in

AIJ projects involving many individual farmers was the use of a group certification and

monitoring approach instead of separately undergoing numerous procedures.

The important issue of whether temporary or permanent emission reductions would be

created through the plantations was often not specifically addressed in AIJ project reports.

Some projects aim at a specialized marketing of their harvested timber exclusively for the

purpose of producing furniture and packaging materials to ensure carbon sequestration of at

least 100 years.

d. Institutional issues and national development policies Among the AIJ investor countries, Norway, The Netherlands and the USA were especially

active in the area of AR. Host countries for AIJ projects are found mainly in South and Central

America.

It was found to be important that AIJ projects are in line with national development and

environmental strategies, but also often naturally correspond to economic goals such as

augmenting the country’s renewable energy supply, internalizing costs of environmental

services and selling of goods in which the country has natural comparative advantages, such

as cost-effective CERs and timber.67

AIJ project reports often quote the integration of local authorities as being a crucial con-

tribution to project success. Their involvement in the project design process, such as decision

making on land use strategies, project locations and implementation steps ensured compliance

with their preferences and prevented institutional obstacles from the outset. Constant commu-

nication with and involvement of national and federal authorities was also reported to be

important, even though their cooperation might have been occasionally hesitant in some

project regions.68

e. The social dimensionThe problems often encountered by AIJ managers in the on-site project implementation at

communal level were characterized by poor education, high unemployment, poverty and

degraded natural resources, lack of technical support and little experience in the commercial-

ization of products.69 Main responses to make projects work under such conditions consisted

of the provision of sustained technical assistance, contractual long-term commitment of all

parties, the creation of direct financial incentives and community involvement in planning

processes and project monitoring.

67Costa Rica/Norway Reforestation and Forest Conservation Project report, as submitted to the UNFCCC

(http://unfccc.int/program/coop/aij/aijproj.html).68

FACE Foundation project experiences, personal communication with Hans Verweij, Director of FACE.69

Rio Bermejo Carbon Sequestration Project report, as submitted to the UNFCCC

(http://unfccc.int/program/coop/aij/aijproj.html).

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III. Previous activities: Lessons for implementing CDM AR activities

The encouragement of participatory and democratic decision making and the strengthening

of the planning and technical capacity of local organizations have been crucial elements of

support given to farmers and communities in AIJ. In particular the involvement of all local

stakeholders in decisions about the on-site project objectives is described to be an essential

step to achieve compatibility with the goals of the community for economic development,

socio-economic and environmental priorities.70 Other areas of technical support included

training sessions on tree planting and plantation maintenance, creation of tree nurseries and

on the environmental and social requirements related to sound carbon sequestration activities.

Participation and communal cooperation were realized in all cases by sustained regular

financial flows from investors to the project implementers. It has to be considered that tree

plantations under the CDM compete with other forms of land-use in the traditional agricultur-

al systems, which might not be economically beneficial in the long run, but are, firstly, deeply

rooted in the cultural environment in which CDM is realized and secondly, will provide

apparently more direct benefits through the production of food and fibre. The payments

realized in AIJ projects were either related to extension of reforested area and realized work

or calculated directly according to the carbon sequestered – the latter benefit will arise in

CDM projects through selling of t/lCERs (see subsection 1(c) on financial aspects). As

another economic factor, the monitoring required for the external certification of timber

production and carbon sequestration was carried out or complemented by locals in many

projects. This approach constitutes another form of direct community involvement and

furthermore creates additional employment in the area.

2. The World Bank experienceThrough its carbon finance initiatives such as the Prototype Carbon Fund (PCF), the World

Bank has gained a wealth of experience in designing and contracting greenhouse gas emission

reduction projects in many countries of the world. Only two projects of the PCF relate to land

use change and forestry, both of which would qualify as JI and not CDM projects: The

Moldova Soil Conservation project (afforestation of degraded and eroded state-owned and

communal agricultural lands throughout Moldova) and the Romania Afforestation of

Degraded Agricultural Land Project.

The Bank also administers international funds such as the Netherlands or Italian Carbon

Funds and has a special “Community Development Fund” which could sponsor forestry-

related projects which resemble CDM projects. In addition, a new fund was set up to specifi-

cally cover these types of projects (forest and land-use projects): The BioCarbon Fund.71 The

setup and preparations for the BioCarbon Fund projects yield interesting insights:

BioCarbon Fund projects will have to comply with, inter alia, the World Bank

Operational Policies on Environmental Assessment (OP 4.01), Natural Habitats (OP

4.04), Pest Management (OP 4.09), Cultural Property (OP 4.11), Involuntary

70Community Silviculture in the Sierra Norte de Oaxaca project report, as submitted to the UNFCCC

(http://unfccc.int/program/coop/aij/aijproj.html).71

http://carbonfinance.org/biocarbon/router.cfm?Page=Projects

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Legal Aspects in the Implementation of CDM Forestry Projects

Resettlement (OP 4.12), Indigenous Peoples (OP 4.20), Forests (OP 4.36), as well

as the Policy on Disclosure of Information. Thus, projects will have to comply with

both substantive and procedural standards, while the CDM UNFCCC projects –

from an international law point of view – must only meet procedural requirements

(socio-economic impact and environmental impact assessment);

the BioCarbon Fund is not restricted to afforestation and reforestation and might

thus produce important examples for possible future phases of the CDM;

procedurally, the cycle is comparable to the procedures of CDM projects: interested

parties will have to submit a Project Idea Note or PIN which should include

information on: the type and size of the project; its location; the anticipated total

amount of Greenhouse Gas (GHG) reduction compared to the “business-as-usual”

scenario, the suggested crediting life time; the suggested Certified Emission

Reductions (CER)/Emission Reduction Units (ERU) or verified Emission

Reduction (vER) price in US$ or € /ton CO2e reduced; the financial structuring

(indicating which parties are expected to provide the project’s financing); the

project’s other socio-economic or environmental effects/benefits; and

the main legal issues as identified by the BioCarbon Fund are: how to separate legal

ownership of the carbon, identification of legal rights and interests in the land,

forestry rights and ownership of the timber and how to manage the permanence

risk.72

Acknowledging that rights to land and forests will have a significant impact on rights to

carbon, and that few of the countries in question will have pertinent legislation in place, the

World Bank places particular emphasis on developing adequate contractual arrangements. For

instance, in the case of the Kenya/Tanzania Small Group and Tree Planting project,73 “Small

Groups” that are responsible for maintaining the trees sign a covenant indicating the partici-

pation requirements and a greenhouse gas contract that spells out their obligations. In the

Colombia San Nicholas project74 contracts with landowners that will be clear and easy to

understand seek to avoid potential risks relating to land tenure. The sharing of benefits, which

will be directly distributed to landowners, will be based on the surface brought to the project

by each landowner. In the Colombia Silvopastoral Rehabilitation project75 every farmer

involved in the project will sign a contract to formalize his commitment to manage the

plantation properly during the lifetime of the project.

From these, it is clear that a transparent and secure position of title to land will effect

security of emission reductions and will therefore represent an important plus for a project

proposal. This is in line with the findings of this study based on the four country examples.

72“How do you get (and continue to have) what you think you’ve got? Land use, Land-use change and Forestry

projects” by Robert O’Sullivan (Carbon Finance, Cofinancing and Project Finance Legal Department, World

Bank), presentation held at Carbon Expo, Cologne, Germany, May 12, 2005.73

http://carbonfinance.org/biocarbon/router.cfm?Page=html/TanzaniaSmallGroupandTreePlanting.htm 74

http://carbonfinance.org/biocarbon/router.cfm?Page=html/ColombiaSanNicolasAgroforestry.htm75

http://carbonfinance.org/biocarbon/router.cfm?Page=html/ColombiaSilvopastoralRehabilitation.htm

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III. Previous activities: Lessons for implementing CDM AR activities

In addition, although many of the projects making up the portfolio of the first tranche of

the BioCarbon Fund are in their infancy and cannot as yet provide experience for the CDM,

some features of these projects relevant to this study should be noted:

the Mexico Seawater Agroforestry project76 demonstrates the potential economic

viability of having a managed forest in non-productive desert land, whose financial

risk is lowered by the sale of emission reductions.

the Colombia Silvopastoral project features an outreach component that is aimed at

encouraging the replication of the systems used in the project.

the Madagascar Andasibe-Mantadia Biodiversity Corridor project77 demonstrates

possible tradeoffs between biological feasibility with social acceptability. As stated

in the thematic information available on the project, simple restoration of the natural

forest would have been biologically feasible. However, livelihood considerations

called for the inclusion of non-native species. In this regard, non-native species that

have no historically demonstrated threat to the environment are proposed to be used

in other BioCarbon Fund projects such as the Colombia Silvopastoral Rehabilitation

project, the Albania Assisted Regeneration project78 and the Nicaragua Precious

Woods project.79

the Nicaragua Precious Woods project will use the FSC monitoring and controlling

procedures for monitoring the environmental risks of the project. The

Kenya/Tanzania Small Group and Tree Planting project uses the FAO

“Conservation Farming Handbook” in developing local best practices and conserva-

tion farming methods. The socio-economic impacts of the Andasibe-Mantadia

project in Madagascar will be monitored using human well-being indicators

developed at local authority level and by measures specific to the project.

3. Learning from projects discussed in the case studiesAfforestation and reforestation projects existed in the countries subject to the case studies

(Argentina, Chile, Ghana, the Philippines) long before the CDM rules were agreed to, and

lessons from these projects could thus not be ignored in designing a CDM framework. We

therefore asked the consultants to look at what lessons could be learned from these other

projects.

Previous AR projects in Argentina stressed the need for meaningful stakeholder

involvement at an early stage and improving the general awareness among the population

regarding CDM, a lesson echoed in the Philippine examples. The Argentinean projects also

highlighted the difficulties that any project involving native and often slow-growing species

face.

76http://carbonfinance.org/biocarbon/router.cfm?Page=html/MexicoSeawaterAgroforestry.htm

77http://carbonfinance.org/biocarbon/router.cfm?Page=html/MadagascarBiodiversityCorridor.htm

78http://carbonfinance.org/biocarbon/router.cfm?Page=html/AlbaniaAssistedRegeneration.htm

79http://carbonfinance.org/biocarbon/router.cfm?Page=html/NicaraguaPreciousWoodsReforestation.htm

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Legal Aspects in the Implementation of CDM Forestry Projects

One important lesson learned in Chile was that of correct timing, as one project that tried

to obtain CERs failed because the project was implemented before COP 9 and could thereafter

no longer adjust to the rules and procedures adopted in Milan on CDM AR.

The information generated from Philippine-based AR projects is expected to improve data

on carbon sequestration potentials, one of the major challenges for CDM AR projects. Initial

information generated from these projects seems to point to the higher carbon sequestration

and storage potential of community-based forestry management areas compared to those of

the timber license agreements and industrialized forest management areas. The projects also

showed the multiple potential economic and social benefits for communities that could

contribute to ongoing discussions on and refinement of the sustainable development indicators

of such projects. They also demonstrated the great potential of hybrid projects.

4. ConclusionsEven with the acknowledged differences between CDM AR projects and the projects reviewed

above, there are important lessons to be learned from past experience. The BioCarbon Fund

projects also offer relevant insights even at this early stage.

While, as shown in the AIJ examples, it is often not feasible for an investor to acquire

ownership of the land required for carbon sequestration, this does not diminish the importance

of clear and stable title to land, which is the foundation for stable rights to CERs, as indicated

by the World Bank’s experience. AIJ also offers important lessons on how costs can be

reduced when dealing with multiple stakeholders. While CDM could not fully adopt the

financial structures used in AIJ, allowing the project participants to benefit from the up-front

payment of some of their costs, it is possible to find a mid-way between this scenario and the

prospect of receiving all revenues only once the CERs are generated. The BioCarbon Fund

projects provide models for stakeholder organization and contractual arrangements with

project participants. Finally, the existence of other types of AR projects that will not disappear

simply because of the arrival of the CDM indicates what types of alternatives and competing

uses exist, as well as the context in which CDM AR projects can be developed.

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IV. The development context – ODA and CDM

During the negotiation phase of the Kyoto Protocol and of the specific rules on the operation

of the CDM, the relationship between CDM activities in general and official development

assistance (ODA80) activities was perceived as problematic. A major objective for developing

countries and NGOs was to prevent the diversion of ODA funds into CDM projects as this

would not be in line with the belief that climate activities must be supplemental to those funds

already flowing between Annex I and non Annex I countries. A more technical issue was how

CDM activities could be seen as “additional” in the sense of Article 12.5(c) of the Kyoto

Protocol if they might have been funded without the intervention of foreign investors through

ODA channels. From the point of view of development assistance several questions are being

contemplated, such as to what extent ODA activities might be needed to provide the

framework for CDM activities in practice and how ODA can be used to ensure high quality

CDM projects. Similarly, some have criticised the CDM because its climate-drivenness might

diffuse the general objectives of ODA such as poverty alleviation and because it will have

little to no influence on carbon sequestration opportunities in developing countries. This

section intends to explore these questions in brief, because they are of importance for strategic

choices to be made by host country Governments and Annex I Parties alike.

1. Impact of CDM AR activities on existing/planneddevelopment-related forestry activities

The actual impact of the CDM on forestry-related activities compared to “traditional” ODA

financed activities is seen to be relatively small, a perception shared by the consultants who

undertook the country case studies.

By way of example, and taking a look at the state of the world’s forest, the plantation area

in developing countries (non Annex I countries) in the year 2000 amounted to approximately

120 million ha.81 While ODA in recent years has concentrated on community-led projects

focusing on sustainable land-use and resource-use patterns, institutions such as development

banks still finance (including via grants) large-scale afforestation programmes. Accordingly,

a large proportion of these reforestation schemes have been supported by ODA, especially in

China and India.

80ODA is the OECD term for aid to developing countries that is used in Development Assistance Committee (DAC)

statistics. To qualify as ODA, an official expenditure must: have “as its main objective” the promotion of the

economic development and welfare of developing countries and be concessional, i.e. either a grant or a conces-

sional loan. The main focus of GTZ in international cooperation is on so-called Technical Cooperation. Far from

being centred on transferring technical knowledge, this involves primarily communicating knowledge that enables

people to shape their present and future on their own. For this, GTZ strengthens individual initiative and the capa-

bilities of people and organizations, and lays the basis for stable development – for future generations as well. In

this context, the CDM as a market-based mechanism is interesting as it might provide income for communities

for long time spans.81

Africa: approximately 8 million hectares, Asia: approximately 100 million hectares, where China (45 million

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Legal Aspects in the Implementation of CDM Forestry Projects

Development/forestry experts have stated that, compared to this total area of about 120

million ha the area which can be covered through CDM AR might be negligible. The reasons

for this statement vary from lack of additionality (large-scale afforestation projects are often

an integral part of regular economically viable national afforestation schemes and may

therefore not qualify as additional), to the fact (supported by experience) that transaction costs

for small scale afforestation projects are high and therefore, in the context of the CDM,

possibly prohibitive.

Moreover, the real challenge seen by development experts and climate community alike is

to halt deforestation in tropical areas. These figures are well known: Brazil, having a

plantation area of 5 million ha, is reporting a loss of forest cover of 23 million ha in the ten

year period 1990–2000. Taking into account that for one hectare of a mature tropical forest,

which is destroyed within one year, it will take a one hectare plantation some 100 years or

more to sequester the amount of carbon which has been lost through deforestation, the impact

of the CDM in its current format will be small and in no way replace the necessary efforts in

forest conservation/halting deforestation from the development assistance side as well as from

the Governments in developing countries.

2. Diversion of ODADecision 17/CP.7 clearly states that “public funding for clean development mechanismprojects from Parties in Annex I is not to result in the diversion of official developmentassistance and is to be separate from and not counted towards the financial obligations ofParties included in Annex I”.

First it should be noted that there is no mechanism to prove that no diversion is taking place

in fact. Given that ODA funding is voluntary and, even if the official 0,7% UN target remains

on the agenda, no benchmarks exist against which to evaluate this “supplementarity”.82

Therefore, to ensure credibility of the international climate regime’s decisions,

Governments needed to ensure that CDM funds would at least not be “labelled” ODA.

Therefore, to ensure transparency and the credibility of OECD statistics (which aims to

provide reliable data on ODA flows), the OECD Development Assistance Committee (DAC)

has decided that public funds that finance “normal” CDM projects can be called ODA. In

other words, concessional public expenditures on CDM activities can be reported as ODA, but

with a deduction for the donor funds used to purchase CERs. If instead of receiving CERs a

donor donates them to the host country, no deduction would be necessary, and thus the full

hectares) and India (32.5 million hectares), alone constitute 77% of the total and Indonesia (10 million hectares),

and Thailand (5 million hectares) take this up to 92 % of the total; Central America: negligible on a global scale;

South America: approximately 10.5 million hectares with Brazil (5 million hectares) and Chile (2 million

hectares) taking the lead (FAO (2001) FRA 2000 Chapter 3; FAO Forestry Papers, 140).82

Documentation of this must be provided by the project participants. According to decision 17/CP.7 – Appendix B

the project design document “shall” contain “information on sources of public funding for the project activity fromParties included in Annex I which shall provide an affirmation that such funding does not result in a diversion ofofficial development assistance and is separate from and is not counted towards the financial obligations of thoseParties”.

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IV. The development context – ODA and CDM

amount of project finance will be counted as ODA.83 This agreement also means that, in a

situation where a project is financed by ODA and a CER purchase agreement exists (i.e. the

donor Government pays for the CERs generated by the project it initially financed), the initial

project costs will be registered as ODA.

It should be noted that monies used to provide appropriate CDM frameworks (technical

assistance such as capacity building) can be counted as ODA84 and there is no possibility of

ruling out that these might have otherwise been used differently. In essence however it seems

that “diversion of ODA” only occurs if the CERs generated through project development and

implementation flow directly to the donor country. In contrast, if the donor buys the CERs

generated at market prices from the host country, this might (pending an OECD decision on

technicalities) be qualified as ODA as this will be seen as non-diversion (Dutschke and

Michaelowa 2006).

3. Additionality The issue of additionality is different from the one discussed above, regarding diversion of

ODA for CDM purposes. Additionality in the sense of Article 12 of the Kyoto Protocol as it

relates to development assistance means: Can a project that might have been financed via

ODA become a CDM project, i.e. satisfy the additionality criterion? This question is still

subject to debate.

Some argue that, given that the need for ODA reflects the non-viability of a project in an

economic or institutional sense or indicates a lack of capacity, ODA eligibility of a given

project cannot render it ineligible as CDM project: Technical and financial assistance for AR

projects is provided only when and if the host country is not in the position to carry out such

project of a specific quality on its own. The “barriers” which exist to project implementation

may be of a financial or institutional nature, but may also be due to insufficient technical know

how. Usually, AR projects supported by technical and financial assistance have a “model or

pilot” character. These models or pilot projects should later be replicated and scaled up by the

host country, when the financial conditions and the capacity of the implementing institutions

have improved. Thus, ODA-financed projects will not be “business-as-usual” given these

barriers. This position is supported by the “Tool for the demonstration and assessment of addi-

tionality in A/R CDM project activities”85 recommended by the CDM Executive Board’s AR

Working Group and approved by the CDM Executive Board at its 21st meeting (see Chapter

V for further details). Others argue that this definition of additionality is not covered by the

text of the various COP decisions, especially decision 19/CP.9 which, in defining additional-

ity only refers to the baseline carbon scenario and not to the financial situation etc. This issue

is discussed further in Chapter V.

83DAC/CHAIR(2004)4/FINAL (Appendix) and OECD CDC/DAC/2004/17. The principles were endorsed by the

DAC High Level Meeting, see DCD/DAC/A(2004)5.84

The DAC considered that support for “generic” CDM-related capacity development, which is not tied to a

particular CDM project and which would not in itself result in the generation of CERs can be reported as ODA.

It was also emphasised that in some cases there may be ambiguity as to what constitutes “generic capacity

development” and what should be considered as part of the CER-generating investment. 85

Annex 16 to the Report of the 21st meeting of the Executive Board of the Clean Development Mechanism held

from 28 to 30 September 2005, available at http://cdm.unfccc.int/EB/Meetings/021/eb21repan16.pdf

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Legal Aspects in the Implementation of CDM Forestry Projects

4. The role of the CDM for development assistance andvice versa

While many development agencies are not active in the field of implementing AR projects as

they are defined for CDM purposes, the CDM might serve as a motor and additional incentive

for conceptualizing such projects. Any agency could design a particular portfolio, combining

climate aims with development objectives, to attract public funding.

For Governments this could be particularly interesting as ongoing or planned forestry

projects influence policy in the partner countries. For example, while there are normally no or

few substantive standards, development cooperation projects will tend to adopt standards such

as CCBA (“Climate, Community and Biodiversity Alliance”),86 FSC or CIFOR. Thus, foreign

financing sometimes means that distinct legal frameworks must be adopted to accommodate

the desired operation of the project. The CDM itself does not set any substantive standards of

this kind and combining ODA with CDM purposes might thus be useful.

Moreover, technical assistance for CDM AR projects (as it has been extensively provided

in the past years for the establishment of DNAs etc) is useful and would fit into the general

objectives of development cooperation as an enabling mechanism. If such assistance projects

show how high quality CDM AR projects can be implemented in an effective and efficient

way, taking into consideration social and environmental aspects, it can be expected that the

private sector will replicate such projects, or they would be scaled up by the host country

without external assistance (unilateral CDM).

86See www.climate-standards.org/

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V. Synthesis and discussion of country study findings

As mentioned in the Introduction to this paper, four case studies in Argentina, Chile, Ghana

and the Philippines were conducted by regional consultants. The countries were chosen based

on interests of regional balance, presence of the collaborating organizations in these countries,

and also the availability of English-speaking legal experts in these countries. The objective

was to determine how previously identified legal issues such as those mentioned in Chapter II

to IV would play out in different jurisdictions under varying circumstances and legal

traditions.

To ensure that the consultants would look at a similar set of issues, a questionnaire was

developed on the basis of the results of the brainstorming and needs assessment described in

the Introduction. This questionnaire consisted of seven pages and was divided into general

questions, questions relating to the CDM project cycle, and conclusions and recommenda-

tions.87

Case studies were carried out from May 2004 and finalized in April 2005. The preliminary

findings of the case studies were presented to participants at a side event at COP 10 in Buenos

Aires, Argentina in December 2004. On the basis of the preparatory work and the discussions

at the side event, this paper took shape and the case studies were finalized. These were meant

to be desk studies, but in fact, all of the consultants conducted some degree of informal con-

sultation with governmental and nongovernmental experts to respond fully to the questions

posed to them.

The subsequent discussion is based on the findings presented in the case studies, which are

annexed to this paper in the form of a CD. Findings are grouped according to the themes used

in section 3 of Chapter II. Updates and additional analysis have also been provided with

regard to issues that were not fully discussed in the case studies.

1. The many faces of additionalityBoth in the needs assessment described in the Introduction and the country studies we

encountered questions about CDM project additionality as required by the Kyoto Protocol in

a situation where a country already employs nationally binding afforestation policies and/or

has enacted/adopted forestry plans and related incentive systems.88 Will CDM AR projects

still be found to be additional if they are in fact implementing existing plans or policies?

87This questionnaire can be found at the beginning of the case studies.

88Such incentive schemes (e.g. subsidies for afforestation operations) exist because forests are perceived as public

good which benefit the general public as well as the operator. The CDM is a special type of incentive, rendering

the carbon sequestration potential a marketable good. A Government could however, also with the CDM, retain

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Legal Aspects in the Implementation of CDM Forestry Projects

Examples of binding afforestation policies can be found in Ghana and the Philippines:

Under Ghana’s Timber Resources Management (Amendment Act), 2002 (Act 617), parties

to a Timber Utilization Contract (TUC) with the government must execute an undertaking to

design a reforestation or afforestation plan of at least 10 hectares for each square kilometre of

the contract area during the period of the contract to the satisfaction of the Chief Conservator

of Forest. While the implementation of the AR plan in this case is a legal precondition for a

harvesting concession, the consultant argues that reforestation or afforestation projects that

fulfil this legal obligation could still fall under the CDM AR if the TUC holder does not

otherwise have the means to fully carry out this obligation.

In the Philippines, the holder of an industrial forest management agreement (IFMA) has the

responsibility to reforest open/denuded lands found within areas classified as protected forest

lands and within 20m strips from both sides of river banks. Holders of forest land grazing

management agreements must reforest at least 10% of the leased area. Would a demonstrat-

ed inability to carry out this obligation due to identified barriers prove that a proposed CDM

AR project within the IFMA framework could still be additional, as is argued in the Ghanaian

case?

In Chile there is a voluntary incentive programme established by Law Decree 701, the

Statute of Forestry Promotion (1974, modified in 1993 by Law 19.561) which establishes a

differentiated system of bonuses and tax exemptions for forestry activities developed on

certain lands. Chile has been foresting and reforesting approximately 100,000 hectares for the

last 15 years, so it might be generally difficult to prove that CDM AR projects would not have

happened in the absence of CERs.

With regard to incentive systems, in Argentina, there is the Forestry Promotion Law, Law

No. 25.080 which created an incentive regime for all new forestry activities and the expansion

of existing plantations.

In Ghana, the Forestry Plantation Development Fund seeks to encourage small-scale and

private sector commercial plantation developers and public sector institutions to embark on a

sustained programme for afforestation and reforestation that will rehabilitate degraded forest

lands and increase timber production. The consultants have argued that the CDM would only

constitute another incentive for the enforcement of AR policies and thus, additionality should

be assumed.

How can these assertions and situations be tested, and EB decisions on the matter of addi-

tionality reasonably predicted, if at all? For this we must turn to the COP’s and the EB’s

guidelines on additionality.

its incentive systems as the many other services forests provide, apart from carbon, remain separate public goods.

Or a Government may even choose to support management of forests for carbon sequestration by payment of

subsidies, such as in Costa Rica, where forest landowners are paid directly for management that promotes carbon

sequestration. Subsidies could come in the form of lump sum cash payments, tax deductions or tax credits. (See

FAO legal study, pages 31 and 51). This is when the additionality issue must be seriously considered.

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V. Synthesis and discussion of country study findings

According to the Marrakesh Accords, a “CDM project activity is additional if anthro-pogenic emissions of greenhouse gases by sources are reduced below those that would haveoccurred in the absence of the registered CDM project activity.”89

The additionality test is part of the baseline methodology, together with the formulae and

parameters for estimating baseline emissions and the description of leakage sources (see

Report of 10th CDM Executive Board (EB) meeting90). At its 15th meeting the EB adopted

“Tools for Demonstration of Additionality” (Annex 3 to the report). This document was

amended at the EB’s 16th meeting and further amended at its 17th meeting. These tools are

intended for use for all potential CDM projects, not only for AR activities.91 Essentially, this

“Tools-Document” establishes a step-wise approach to assess additionality.

To fit the particular issues relating to AR activities, the EB has approved a “Tool for the

demonstration and assessment of additionality in A/R CDM project activities” (AR tools

document) at its 21st meeting held from 28 to 30 September 2005. Like the general Tools-

Document, the AR tools document suggests steps to show that an AR activity is additional:

Identification of alternatives to the A/R project activity (the possible baselines);

Investment analysis to determine that the proposed project activity is not the most

economically or financially attractive; or barriers analysis; and

Impact of registration of the proposed afforestation or reforestation (A/R) project

activity as an A/R CDM project activity.

Both documents provide only a general framework for interested parties and will not replace

the need for justification of the specific baseline methodologies.

In terms of national level implementation it is interesting to note that according to the AR tools

document, all of the proposed alternatives:

“shall be in compliance with all applicable legal and regulatory requirements, evenif these laws and regulations have objectives other than land-use and relatedregulations, e.g. conservation of biodiversity, soil and water resourcesprotection/conservation, tax and investment regulations, mitigation of airpollution.”

89Dec. 17/CP.7 Annex, para. 43

90 All CDM EB documents can be obtained on: http://cdm.unfccc.int

91 Decision 12/CP.10, Guidance relating to the clean development mechanism points out, in paragraph 9, that as

indicated by the Executive Board in par. 3 of the “Tool for the demonstration and assessment of additionality”

(Annex I of the Report of the Executive Board on its 16th

meeting), said tool is not mandatory for project partici-

pants. This is a policy repeated in the AR tools document, which states that project participants may also propose

other tools for the demonstration of additionality to the Executive Board for its consideration. However, given the

cost of developing and using alternative tools, we think it is likely for project participants to continue to rely

primarily on the EB-developed tools and therefore use it as a basis for our analysis.

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Legal Aspects in the Implementation of CDM Forestry Projects

This implies that the planned CDM AR activity should indeed also comply with these

regulations, even if such a requirement is not included in the existing decisions of the COP,

draft decisions of the COP/MOP or decisions of the EB. Indeed, this is clear from paragraph

5 of sub-step 1b of the AR tools document which says:

“[i]f the proposed project activity is the only alternative amongst the onesconsidered by the project participants that is in compliance with all regulations withwhich there is general compliance, then the proposed A/R CDM project activity isnot additional.”

Given the insufficient enforcement of environmental laws and regulations in many potential

CDM host countries, a situation which has also been highlighted in the country studies it is

worth noting that this test shall not apply if the policies are “clearly not enforced”. This could

lead to a situation where, for example, illegal logging practices could be used as an alternative

scenario, potentially making large areas of land qualified for CDM AR activities.

According to paragraph 4 of sub-step 1b of the AR tools document, an objectively illegal

alternative will only be eligible for comparison with the planned CDM activity if project

partners can show that:

“based on an examination of current practice in the country or region in which thelaw or regulation applies, those applicable legal or regulatory requirements are sys-tematically not enforced.”

From the evidence given in the country studies it seems possible that the implementation of

CDM AR will effectively only lead to the enforcement of already existing land- or

environment-related legislation, and by branding these project activities as CDM AR, we

assume that the activity can pass the ensuing investment or barrier tests.

With respect to the forestry plans and programmes identified in the country studies as being

potentially problematic in relation to the additionality requirement, applying the AR tools

document would, in our opinion, mean that a proposed project activity that would simply fulfil

legal obligations attached to timber harvesting concessions should not be eligible under the

CDM, as the alternative scenario would imply a breach of law.

Yet, as we have seen from our country studies, forestry plans and programmes are mostly

declaratory or voluntary, due in part, perhaps, to the acknowledged insufficiency of

government or domestic resources to fully implement these plans and programmes. In most

cases, as our consultants have noted, the mere existence of these plans and systems does not

mean that specific land areas will be afforested or reforested. Sometimes (like in the case of

Ghana and Argentina) Governments will establish an incentive system to encourage imple-

mentation by the private or non-governmental sector. Also, as in the case of Ghana, loans or

grants are received for the implementation of certain schemes, such as the Community Forest

Management Project (CFMP) which is executed under the Forestry Development Master Plan

(1996–2020). Similarly, in the Philippines, afforestation and reforestation activities under the

community-based forest management system and other community projects have largely been

donor-driven.

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V. Synthesis and discussion of country study findings

The AR tools document explicitly only applies the described test to legally binding

national laws and regulations. But judging from the existing rule on regulations and laws, it

would seem that the execution of a project included in a non-binding forestry plan or

programme which would not be otherwise economically feasible or attractive (economic addi-

tionality) would not pre-empt additionality – rather, compliance with such a plan or

programme could enable the project participants to make a strong initial case for the

compliance of the project with the host country’s sustainable development goals, i.e. in

compliance with Article 12 of the Kyoto Protocol.

Such a conclusion is, however, only an informed prediction of how the EB would deal with

such cases.92 In particular cases where the Government upheld incentive schemes which

operate alongside the CDM, the EB will have to make a case-by-case decision.

An idea for CDM host countries to resolve such uncertainty comes from Argentina which

has stipulated explicitly that any benefits paid under its Law 25.080 (on forestry promotion)

to forestry projects designed with the sole or complementary purpose of acting as carbon sinks

are to be reimbursed to the State from the proceeds of future sales of carbon credits in

accordance with the schedule to be established by the regulatory authorities (article 19 of

Regulatory Decree 133/99).

If the possibility of demonstrating additionality arises, however, from the non-binding

nature of the policies, it is reasonable to wonder whether the AR tools document would not,

in fact, hinder the development of legally-binding policies, as such policies would raise the

bar and make it more difficult for the host country to demonstrate additionality. In the case of

Argentina, for example, the consultant points to the concern that the existence of guidelines

that are too strictly worded or specific may end up ruling out the viability of certain projects

because of their failure to meet the additionality test. Paragraph 3 under sub-step 1b of the

AR tools document appears to partially address this question by providing that “[t]his sub-step does not consider national and local policies that have been implemented since theadoption of the Modalities and Procedures for the CDM,” i.e., 11 November 2001.

However, paragraph 4 of the recently adopted “Clarifications on Procedures and

Documentation which need to be Used for the Renewal of a Crediting Period”93 provides that:

“[a] change in the relevant national and/or sectoral regulations between twocrediting periods has to be examined at the start of the new crediting period . . . Ifthe new regulation applies to existing CDM project activities, the baseline has to bereviewed and, if the regulation is binding, the baseline for the project activity shouldtake this into account.”

In the case of updating the baseline, project participants are required to assess and incorporate

the impact of new regulations on baseline emissions.94 It seems therefore, that the various

92 We note in this regard that the EB still needs to develop guidance on national and sectoral policies.

93 Annex 7 to the report of the Executive Board on its 20

th

meeting (8 July 2005).94 Id., par. 7.

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Legal Aspects in the Implementation of CDM Forestry Projects

additionality rules could have a chilling effect on progressive policies and legislation, unless

the EB clarifies the general rule incorporated in the AR tools document.

With respect to incentive schemes that might apply to SSc CDM AR projects such as the

one in Ghana described above, it is unclear how the various possible types of incentives would

impact on additionality. Would direct subsidies imply a clearer case of non-additionality than

would tax breaks or credits, on the theory that while there is a “gain” in both instances, only

in the case of a direct subsidy is something actually given out? On a macro level this question

might be impossible to resolve. It is clear, however, that the specific CDM incentive must not

act as disincentive to other schemes that benefit natural resource protection, development and

poverty alleviation.

As to existing or planned projects funded through development grants, the AR tools

document is silent. It must be noted that the OECD rules adopted by the DAC in April 2004

on ODA and CDM will not automatically be applied by the EB.95 Roughly applying the AR

tools document, no CDM funds flowing into a development grant-funded project would be

regarded as business as usual (and thus be considered additional) because the CDM activity

would not be financially attractive. Thus, even if a forestry plan could be funded in part or full

by ODA or other sources (development banks, etc.) additionality could be shown as long as

the project would not have been conducted on the basis of economic feasibility.

2. Restriction to afforestation and reforestationThe difference in the definitions of the terms forest, afforestation and reforestation under the

COP decisions and in the case study countries are not anticipated to pose any serious legal

obstacle to the implementation of CDM AR projects in these countries. One reason is that the

term “forest” is already defined in different ways for different purposes in some of these

countries (e.g., the Philippines). Another reason is that necessary adjustments, if any, to the

definitions could very well be encompassed within regulations to be issued for the DNA and

will not necessarily entail legislative amendments, since no land reclassification would be

involved in the countries studied so far. However, as pointed out in subsection 3(b) of Chapter

II, the election of a particular value within the range given under the official definition of the

term “forest” under the CDM rules would imply a further restriction of the afforestation and

reforestation project activities that the DNA could approve.

Since afforestation and reforestation activities existed long before the development of the

CDM, the different types of AR projects in the case study countries are governed by different

set of laws, rules and regulations. These variations can affect the types of CDM AR project

95 DAC/CHAIR(2004)4/FINAL. This document deals with the requirement that CDM activities be additional to

ODA and not simply divert ODA. The general rule is that ODA can be used to finance CDM projects, as long as

the generated CERs are not transferred to the donor Government, but retained by the host Government to be

marketed. Otherwise, CERs resulting from ODA-financed CDM projects will be considered as a return to the

donor and give rise to a deduction from ODA flows. See also Dutschke, M. and Michaelowa, A., Developmentassistance and the CDM – how to interpret “financial additionality” (2006) Environment and Development

Economics (accepted).

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V. Synthesis and discussion of country study findings

that are implemented in the host country. In the Chilean context, for instance, Law Decree No.

701 for Forestry Promotion establishes a differentiated system of bonuses and tax exemptions

that depend on the land on which the forestry activities are developed. Premium benefits are

given to AR conducted on fragile soils or areas in the process of desertification, AR on

degraded lands and activities to restore the lands, and AR undertaken by small farmers on land

preferentially suitable for forestry96 or on degraded lands.

3. Appropriate legal and institutional system to approveCDM AR projects

With regard to the certificate of approval issued by the DNA, we asked the consultants to look

at whether such a certification could be revoked, especially if it was found that any of the

conditions for its issuance no longer existed. While theoretically, this certificate may be

revoked, the country studies indicate that this is unlikely to happen under present conditions.

Institutionally more important is the fact (as the case studies show) that CDM AR projects

will be subject to a host of other laws and thus often also permits. Thus, an important question

to be resolved is how these permits relate to each other, both at the substantive and the

procedural levels.

For Argentina, a forestry investment or related project would need to obtain permits not

only from the national government, but also from the provincial government. Article 4 of

Decree 133/99 of Argentina’s Forestry Promotion Law authorizes provincial authorities to

recommend the approval of forestry projects involving afforestation in native forest areas only

if proof of the sustainability of the project as regards the natural resources involved,

maintenance of biological diversity, and an increase in the social benefits derived from the

project can be demonstrated. For some provinces, this process would involve going through

an environmental impact assessment and developing a forest management plan, while in

others no formal permitting will be required. Sale of forest products, transportation of timber

or cutting or thinning of forests would also be subject to a host of regulations.

In Chile, the Statute of Forestry Promotion, a voluntary incentive programme, acts as the

central permitting system for AR projects. The law regulates the most important forestry

activities. At the centre of this system is a management plan that needs to be approved by

CONAF, the National Forestry Corporation. Otherwise, the general rule in Chile is to allow

the development of AR activities without requiring any permit or management plan. All the

sectoral permits that have an environmental content are assessed and given through the EIA

system. Consequently, the environmental impact study or declaration includes a section that

demonstrates the project fulfils the environmental requirements of all the sectoral permits

legally applicable to the project.

96 Defined under the Forestry Law of 1931 as “all grounds that due to climate and soil conditions should not be

plowed permanently, independently of whether they are covered by vegetation or not, excluding those grounds

that might be used for intensive agriculture, fruit growing, or cattle ranching without suffering degradation.”

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Legal Aspects in the Implementation of CDM Forestry Projects

In Ghana, any project that involves forest needs to be submitted to the Forestry

Commission (FC) for assessment. If the application is in respect of timber rights, the

Minister’s approval will be in the form of a Timber Utilization Contract. In addition, a

proponent of an AR project is required to undertake a study that will enable him to prepare

and submit a reforestation plan to the FC, as well as an assessment of the likely environmen-

tal effect of the project and proposed programme to redress any such effects. The Government

of Ghana is currently working to put in place a “one-stop shop” for investors interested in

forest plantation development, to facilitate the effort of applicants/investors to secure various

approvals and permits required by the laws of Ghana.

In the Philippines, the process for many permits for or involving AR begins with an

application at the local level of the Department of Environment and Natural Resources, the

Community Environment and Natural Resources Office. Local government permits are also

likely to be required, as is an environmental impact assessment. In addition, projects in

ancestral domain or land will require additional special permits.

Another related aspect that came out in the country studies is the inevitable interaction

between the DNA and the local governments. This interaction is particularly imperative in a

country such as Argentina, which follows the federal system of government and in the

Philippines, where decentralization and devolution of authority to the local governments is

taking place, but also in Ghana and Chile where the local government has authority over

forestry and natural resource-related aspects of CDM AR. In the particular case of Argentina,

prior to the approval of any CDM project activity, applications are sent to the province where

the project activity will take place, and the provincial authorities given 10 days to comment

on the application. Vertical integration is, therefore, as much a concern as horizontal

integration.

This allows the general conclusion that obtaining permits will, both for non-CDM and

CDM AR projects, be more complicated in countries with federal systems, but that CDM

projects will not be more regulated than other AR projects and possibly even favoured if “one-

stop shops” are established. However, CDM activities will not, in all cases, mirror existing

forestry activities aimed at harvesting, which is why information on the experience of timber

corporations with national approval processes will not necessarily assist CDM AR project

developers.

These findings also point to another important role that DNAs could play, i.e., to guide

project participants not only through the DNA’s requirements, but also through related

requirements that would ultimately impact on the project’s contribution to sustainable

development. Different requirements will, however, be applied at different stages of the

project’s lifetime, and the DNA should therefore be prepared to extend such assistance even

after a favourable certification has been given. The DNA should also be in a position to advise

project developers regarding when its approval should be sought in relation to other

documents and approvals required. This assumes that the DNA appreciates and fully

understands which rules and regulations apply to and are related to CDM AR project

activities, which in turn would depend, among other things, on how clear the policies and laws

are and how closely different agencies work and communicate with each other. In playing this

role, the DNA could also promote investment in the types of CDM AR projects into which

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V. Synthesis and discussion of country study findings

investments would not otherwise flow, if not for the added incentive provided by the CDM.

Another way in which a DNA could help direct CDM investment into particular types of

projects is through imposing a differentiated system of fees and levies. Examples of such

priority project activities are described in section 1(a) of Chapter VI.

4. Land rights issues, title to carbon and the nature ofCERs

Land rights issues appear to be potentially complicated, not only because of the requirements

of the law, but because of the lack of a proper registration system for title relating to land in

many areas in the case study countries.

Ghana is the country which appears to have the most elaborate system of land ownership.

Land is administered by both customary law rules and practices on one hand and enacted

legislation on the other. No CDM project can ignore subsisting traditional customary rights,

since most of the lands to be used for CDM AR projects (78%) will come from customary

lands. While there is a strong tradition of benefit-sharing schemes, these are being

implemented as policy measures without direct legislative basis.

As pointed out before, the international concept of t/lCERs will in the case of CDM AR

projects be an added complication to land ownership issues. CERs from CDM afforestation

and reforestation projects appeared to us to be particularly challenging to characterize because

of their link to the land and the trees standing on the land. The consultants were asked to

explore whether the concept needs to be incorporated and defined in the national legal systems

to enable the implementation of CDM AR projects and how the right to the land on which the

CDM activity takes place will relate legally to the CERs generated.

Would CERs and the right to CERs be treated as immovables because of their close

association to land and trees, and would they be classified as natural resources? Equally

important, would transfers of ownership or possession of the land that occurred before the

decision to engage in CDM AR project include the transfer of the right to the CERs resulting

from such projects, if this concept did not yet exist when the transfer was made? The answers

to these questions will naturally vary from jurisdiction to jurisdiction, but the country studies

afforded an opportunity to see how these issues would be tackled under particular legal

systems. While the results demonstrate the importance of resolving them at the national level,

e.g., due to its implications on the laws of property, taxation, and natural resource utilization,

it appears that in the short term (i.e., at least in the next two years), host countries will be able

to accommodate CDM AR projects in the midst of trying to resolve legal issues.

No potential host country among the case study countries has yet defined the legal nature

of a CER and in some legal systems this does not seem to pose a problem. The case studies

show that at least theoretically, contractual and existing statutory arrangements will be

sufficient, for the moment, for the legal design and implementation of a CDM AR project

activity. Yet, there might be a lack of security with respect to the ownership of ER/CERs

generated, given that this concept is not specifically defined in the host countries’ legal

systems. For example, a host country could decide to claim ownership over CERs because of

their potential nature as a natural resource, following the doctrine that all land originally

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belongs to the State (e.g. the Philippines). Given this risk and in the interest of stability in

CDM AR related transactions, the consultants were also asked to explore the long-term

prospects for characterizing CERs and the right to CERs in their countries.

The country studies indicate that current laws on property and contract and existing classi-

fications of property may be able to accommodate the concept of CERs and the right to CERs.

For example in Ghana, the right to CERs is potentially recognisable as a right/interest in or

over land capable of being registered in the register of the Land Title Registry. In Chile, the

right to a CER may be recognisable as a private property right. Under the Argentinean Civil

Code, the right could conceivably be characterized as a civil or industrial “fruit.” As a fruit,

the CER would belong to the owner of the source of the fruit, in the absence of an agreement

to the contrary. In the Philippines, it may be possible to characterize a CER as a forest

resource, and the right to a CER as immovable property. As a forest resource, CERs could be

transferred not only to Philippine nationals, but foreigners as well, and as an immovable

property, the interest in the right could be more securely protected than if the CERs were

treated as movable property.

Given the lack of specific legislation in host countries, it was worth examining the current

possibilities of sharing of CERs among project participants, the transferability of CERs (who

is presumed to own them, who can sell or transfer CERs or the rights to CERs, and who can

acquire CERs and the rights to CERs), and the sharing of risk in case the actual CERs

generated do not match the projected amount. Existing or draft Emission Reduction Purchase

Agreements (ERPAs) simply stipulate that the rights to ERs or CERs is assumed to be

transferred from project participants to the purchaser (e.g. the World Bank PCF) at a particular

moment in time (e.g. payment), without attaching any significance to the characterization of

a CER under national law or bothering about public registration or the title to the land. Such

(model) ERPAs essentially assume either i) that, while there is no distinct property right over

ER/CERs, the owner of the land can contractually promise to manage the property in ways to

increase the carbon potential or ii) that the right to CER is a separate alienable right which the

owner of the land can convey to others without conveying the whole property ownership.

The latter seems to be the case in the Indian context, as a recent proposed Project Design

Document (PDD) for a unilateral CDM forestry project demonstrates (see Box 4).

Conversely, some legal systems such as in the Philippines and Argentina actually vest the

ownership of all forests or timber and other natural resources in the State/Provinces. Arguably,

any ER/CERs generated would then also, on its face, be vested in the State and not belong to

the land owner.

Therefore, an ad hoc approach runs the risk of eroding the security of the CERs and the

right to CERs, since such characterizations would at best be legal interpretations that could be

disputed. For instance, an attempt to register the right to a CER on the document demonstrat-

ing title to a particular parcel of land could be refused by a register of deeds who does not

agree with such characterization.

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V. Synthesis and discussion of country study findings

Hence, in looking at the long-term prospects, the fact that most of the case studies admit a

less than stable land tenure and system of registration must be taken into account. Among the

countries, Argentina seems to be most amenable to creating a new legal concept for CERs and

the right to CERs, taking after Law 25.509 (the Law on Surface Rights for Forestry) which

created a new and specific property right over a land surface dedicated to forestry investment.

There are two important precedents in Chilean legislation regarding the right to CERs. One

is the offset programme based on the 1992 emission standard for particulate matter, which

allows one emission source to increase its emissions above the standard if there is another

source that is reducing its level of emissions at the same time under an agreement entered into

by both sources. The second is a system of tradable emission permits that is very similar to

the concept of CERs, except that the credits under the Chilean system apply only to a locally

demarcated basin. For a specific pollutant to be included under the law, a specific regulation

needs to be created. The legal definitions contained in this Bill of Law are, to the mind of the

consultants, antecedents that permit interpreting the legal status of CERs in Chile.

The Philippine Clean Air Act, which opened the door to emissions trading by Philippine

companies without discussion of the nature of emission quotas or credits, could also be used

as a model for the development of a law defining CERs in the domestic context.

Against the risk of legal insecurity must be weighed the need to gain further experience in

hosting CDM projects in general, as further experience may also lead to a better appreciation

of the legal nature of CERs and the right to CERs. Thus, the Argentinean case study argues

against defining this right too quickly. Similarly, an Indian project participant cautioned

against legislative action in this area: The direct transfer suggested in the above quoted PDD

is supported by Indian experience from past generation of voluntary emission reductions

(VERs) where generation and transfers of VERs could happen without any Government

involvement. The Philippine case study, on the other hand, points to the persuasive nature of

any initial characterization of CERs and the right to CERs that the Philippine DNA could

Box 4. Example from a draft PDD, proposed AR project in India/Bagepalli (Project

Participant: Women for Sustainable Development, Karnataka, India)

The farmers have legal title deeds to their lands with survey numbers. Copies of panis(entry copy from the land registry) are available from the tahsildars – the local government

representative at the taluk level who is also the local land registrar. Revenue land and forest

land is listed with the tahsildar and with the range forest officer. Copies of these panis are

also provided by the Tahsildar. Rights to use the forest land are given by the social forestry

officer, and entries in forest department land registry with details of time period for which

the land use is granted, and the lease amount if any, that was paid, is registered with the

tahsildar. A copy of the deed is given to the landless farmer or group of farmers or landless

families who receive the right to occupy the community and forestry land. The rights to

the sequestered carbon are either with the private farmer, in the case of planting on private

lands, or with farmer group, in the case of revenue land or forest department land and can

also be ascertained from the pani copy. The carbon is usufruct, and the forest department

transfers the right to the usufruct to the farmers in a deed of transfer, stating the period and

other contractual details.

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make. In any case, it seems that the situation, where different legal systems define and protect

the right to t/lCERs in various ways and to various degrees might in fact prevail for years since

it seems unlikely that any of the countries studied will pass legislation to define the legal

nature of a CER and the right to receive such t/lCERs in the near future.

5. Social and environmental impacts and requirements toassess and substantive standards

As presented in Chapter II, the issue of substantive environmental and socio-economic

standards for CDM AR projects was very contentious during the negotiations that led to the

Marrakesh Accords. In the end, Parties agreed to only prescribe procedural standards, such as

participation and impact analysis/assessment requirements, depending on a showing of

“significant impact” (decision 17/CP.7, paragraphs 37 b and c) as well as on re-emphasising

that CDM projects should contribute to sustainable development in host countries.

There are thus at least three layers to discuss: one, what substantive legal standards will

apply to CDM AR projects if any and are they necessary to ensure that the project enhances

sustainable development; two, who has decision making power regarding the contribution to

sustainable development and on what basis (criteria); and three, to what extent might the

assessment obligations set by the international rules conflict with or need to be complement-

ed by domestic legislation. We asked the consultants to discuss all of these issues.

a. Substantive standardsSince Article 12 of the Kyoto Protocol speaks of enhancing sustainable development in host

countries via CDM projects, making sure that these projects do not have adverse environmen-

tal and social impacts has always been a target of attention in UNFCCC negotiations. The

provisions of Annex B to decision 17/CP.7 assume that national legislation dealing with the

environmental and socio-economic aspects of CDM AR projects will be sufficient and adhere

to international or regional obligations of the host country with regard to environmental and

social impact analysis and assessment. Hence, Annex B does not provide for any default

standards in case of the absence of adequate legislation. Such legislation would, for example,

require forest management plans, prohibit certain (non-native) species or genetically modified

organisms to be introduced, and require project participants to share benefits with traditional

users of the land.

Our country studies show however, that present substantive and procedural environmental

and socio-economic standards at the national level are not automatically translatable or

convertible into those required under the CDM AR rules and their application as such may

cause great disparities in the quality of CDM AR projects. In some cases (Chile),97 the

substantive standards would be more relaxed than the requirements under current CDM AR

rules while in others (the Philippines), the requirements appear to be much more detailed than

97AR projects in Chile are not subject to environmental impact assessment, unless the project proponents wish to

receive incentives under DL (Decreto Ley or Law Decree) No. 701 on forestry promotion. In addition, there is no

established methodology for assessing social impacts of projects, so that there is more flexibility in their reporting.

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V. Synthesis and discussion of country study findings

that required under the CDM AR rules. We also note that the incentive systems in some

countries add a second tier of environmental standards. For instance, in the case of Chile, reg-

istration to receive the benefits under DL 701 triggers the requirement for a forest

management plan.

The sections of our country studies on benefit sharing intended to identify ways in which

CDM participants could ensure that benefits are shared and thus no adverse socio-economic

impacts result from a particular project. As we have seen from the Philippine example on the

consideration of indigenous people or the Ghanaian Community Forest Management Project,

CDM developers might be able to use the current national practice in forest development as a

role model for their project design.

In Ghana, laws on prevention and control of pests and diseases of plants (including plant

quarantine) and regulations on the importation of plants and seeds (certification standards)

will be applicable in determining whether or not to allow the introduction of alien species in

AR projects.

Despite the intention not to regulate on the level of implementation, decision 19/CP.7

suggests that no significant negative socio-economic or environmental impacts should result

from any AR activities. It requires project participants to describe remedial measures in cases

where significant negative impacts are expected (decision 19/CP.9, para. 12(c)). This will have

to be taken into account by project participants submitting a PDD to the AR Working Group

of the EB and might in fact require legislative action in countries where no laws exist on

which to base an obligation to take remedial measures, or a process against which to test

whether remedial measures planned to be taken will be sufficient.

The country consultants were of the opinion that additional substantive standards will most

probably not be set on the domestic level. So, can – in case the need manifests itself – the

COP/MOP stipulate certain substantive rules to be applied on a project basis, or the EB reject

projects that actually have adverse environmental effects? Theoretically they can, given the

broad mandate of the EB and COP/MOP. But as mentioned in Section 3(b) of Chapter II,

without a clear mandate from the COP/MOP, the EB cannot currently reject projects on

substantive grounds that are not explicitly included in decision 17/CP.7, 19/CP.9 or 14/CP.10.

Even if this is not stated in the Decisions, this follows from the strong opposition of non

Annex I countries against such discretion during the negotiations. On the basis of the country

studies it does not seem desirable to revisit this discussion on the international level, but rather

encourage the host countries and CDM partners to work on sound rules on the national level.

b. Contribution to sustainable developmentThe international rules clearly require that CDM AR projects contribute to sustainable

development in the host country. This in fact is the only “substantive standard” set by inter-

national law but cannot, of course, be compared with concrete requirements regarding forest

management, plantable species, benefit sharing, etc. The current rules leave the decision of

whether this requirement is fulfilled to the host country alone, which begs the question of how

to remedy the relative void with respect to substantive standards and requirements. As the

country studies have shown, there are sets of national criteria that the host countries can rely

on.

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For instance, Argentina has sustainable development criteria for natural resources

management. Chile has CERTFOR, the national forest certification system, which incorpo-

rates nine principles in its sustainability standard that are verified before the certification is

granted. Chile regards forestry projects as being intrinsically good. It also assumes that a

CDM AR project that receives a favourable environmental qualification after going through

the environmental impact assessment system assists the country in achieving sustainable

development, and vice versa.

The Ghanaian Ministry of Lands and Forestry’s Mission Statement stipulates that it exists

to ensure the sustainable management and judicious utilization of the nation’s lands, forestry

and wildlife resources for socio-economic development and equitable growth in Ghana. A

document listing a selection of sustainable development indicators for Ghana has also been

submitted to the Cabinet for consideration and approval. These could be starting points for

the development of criteria for sustainable development. Philippine Executive Order No. 318,

issued in 2004, points to certain principles that can be used as a basis for defining sustainable

forestry management and its criteria. Thus, criteria for sustainable forestry management are

currently being devised and may later be incorporated into the process of issuing a letter of

approval for CDM AR.

In any case, in the absence of standards for determining compliance with sustainable

development, as a first step, a host country should use compliance with all the legal require-

ments as a minimum basis for certifying that a project assists a host country in achieving

sustainable development, if these legal requirements are clear and there is a high level of

enforcement of these requirements. This would also be in line with the additionality require-

ments introduced by the AR tools document. In fact, country experts suggested that CDM

projects could help to enforce existing legal requirements in host countries, because through

the PDD both the legal requirements and enforcement practice would become transparent. It

remains to be seen whether this is true – certainly the concrete impact assessment require-

ments described below will be enforced as they form part of the eligibility test applied by the

EB.

c. Requirement to assess impactsAs mentioned, the procedural requirements set on the international level closely link into the

existing national laws. But will the interplay work? For example, none of the countries have

a definition of the term “significant negative impact.” In countries (such as the Philippines

and Chile) where there are parallels to the impact analysis-impact assessment dichotomy

under the international CDM rules, a different trigger is provided. As long as this alternative

standard results in a requirement for impact analysis in the case of some projects, and impact

assessment in the case of other projects that are perceived to have more significant impacts,

the absence of such a definition should pose no serious difficulties. A problem may arise,

however, when there is no difference between environmental impact assessment and analysis,

as this may imply that projects with significant environmental and/or socio-economic impact

will be subjected to insufficient impact analysis, or that projects with minimal environmental

and/or socio-economic impact would have to undergo overly stringent procedures.

Moreover, none of the countries studied have systems for socio-economic analysis or

assessment that were separate from the environmental impact analysis or assessment. In the

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V. Synthesis and discussion of country study findings

Philippine example, the EIA regulations provide guidelines for both environmental and social

impact assessments within its Environmental Impact Statement (EIS) system and it is

assumed, based on these regulations and additional sector-specific guidelines, that social

impacts are considered when the EIA is conducted. This is not necessarily a problem, and may

be consistent with the idea of environmental, economic and social integration under the

concept of sustainable development, as long as there are clear socio-economic indicators

within the EIA system. Thus, in Chile, although there is no established system for socio-

economic impact assessment, many environmental impact reports include sections discussing

socio-economic impacts of potential projects. Moreover, the resolution of socio-economic

issues has been an important element in the negotiation of certain important projects. This is

in line with Chilean environmental legislation, which is based on a wide concept of the

environment that includes socio-economic elements.

In sum, however, the issue of whether CDM AR projects will in fact contribute to

sustainable development, and be based on sound substantive standards/legal rules which are

also enforced, remains contentious and open, not only because of the sovereignty interest of

host countries and the fact that two countries might understand “sustainable development”

differently, but also because the existing legal requirements attached to forestry projects will

differ greatly from country to country, if they are existent at all. We learned from our country

studies that this issue must be monitored for future consideration by Parties.

6. Small-scale CDM ARIt is clear from the case studies that the host country policies afford much importance to what

will constitute “small-scale” afforestation and reforestation projects. For instance, in Chile,

afforestation and reforestation done by farmers on land preferentially suitable for forestry or

on degraded land is one of the most important categories of activities that benefit from the

subsidy or bonus under the Law Decree 701, the Statute of Forestry Promotion (1974,

modified in 1993). Land titles for the owners of small and medium-sized parcels of land may

not, however, be properly recognised. In Ghana, a Forest Plantation Development Fund was

created, among other things, to encourage small-scale commercial plantation developers to

embark on a sustained programme of afforestation and reforestation that will rehabilitate

degraded forest lands and increase forest production. In the Philippines, community-based

forestry management agreements (CBFMAs) are entered into with local communities.

Members of the local community will be eligible if they are actually tilling portions of the area

to be awarded, have been traditionally using the resource for all or a substantial portion of

their livelihood, or are residing in or adjacent to the areas to be awarded.

In Argentina, CDM AR may provide a niche for small community or NGO-led forestry

projects with tangible co-benefits, such as watershed protection, biodiversity conservation or

diversification of production. The fiduciary structure contemplated under the Law on

Fiduciary Trusts (Law 24.441), which is already in widespread use for forestry investments,

can be used by project participants to a SSc CDM AR for pooling their resources to set up a

Forest Trust to administer the project and market the CERs. This could set a practical example

for other host countries as well.

Since the rules on SSc CDM had not yet been adopted at the time the case studies were

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being conducted, the consultants did not factor them into their case studies. We therefore add

a brief analysis of some of its implications for host countries in recognition of the significance

of SSc CDM AR to the overall project objective.

a. Low-income communities and individualsWhile determining who belongs to low-income communities, or who is a low-income

individual, does not necessarily need be the DNA’s responsibility, there may be practical

reasons for including this determination within the scope of the DNA’s power to authorize the

voluntary participation of project participants and confirm that the project activity assists in

sustainable development. For one, the need to go to a different office to obtain such a certi-

fication, e.g., a separate agency dealing with forestry projects or one in charge of low-income

communities and individuals, would add another regulatory requirement.

More importantly, the participation of or implementation by said low-income communities

and individuals of the small-scale afforestation or reforestation project activity may even be

considered by the DNA as one indicator that the project activity is consistent with sustainable

development, due to its poverty alleviation potential. In any case, it is clear from UNFCCC

COP decisions that the criteria for determining who are low-income communities and

individuals should be provided by the host country Party. As discussions of this criterion

during the negotiations for this decision indicate, an acceptable definition of the term “low-

income communities or individuals” will depend on which country, or even which part of a

country, one is talking about.

It is reasonable to conclude that the low-income community or individuals or their

authorized representatives would have to be registered as project participants in the PDD, and

authorized to participate as such by the relevant DNA. This is the interpretation that is

consistent with the objectives of CDM in general, and of the SSc CDM AR in particular.

Otherwise, other project participants could claim that the SSc CDM AR is developed or

implemented by low-income communities and individuals, even if most of the benefits would

accrue to the registered project participants, who may have no clear ties to the low-income

communities and individuals, other than a contractual agreement with them. As an alternative,

i.e., if others were allowed to participate in SSc CDM AR, the DNA would have to require full

transparency of the arrangements between the low-income communities and individuals and

the registered project participants.

In determining whether low-income communities and individuals have actually developed

or are implementing the SSc CDM AR, the DNA may, on the one hand, choose to apply

stringent standards for determining the level of involvement of a low-income community or

individual in a project, or, in the other extreme, simply rely on their certification to this effect,

or choose a host of options in between these two extremes. A thorough verification of

compliance with this requirement appears to be the most consistent with the objectives of the

CDM and SSc CDM AR, but imposing such a requirement may run counter to expectations

that simplified modalities and procedures will be applied by SSc CDM AR, and that measures

to facilitate their implementation will be put in place. On this basis and at this point, it seems

that the implementation of SSc could be managed very differently across host countries,

which might not be in line with the general idea of Parties.

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V. Synthesis and discussion of country study findings

If a low-income community is involved in the CDM AR project activity, there will be the

challenge of dealing with more project participants than a “regular” CDM AR project activity.

Not all of these project participants may have the same kind, or quality, of title over their

portions of the land, further complicating the transactions with them. However, acting through

a designated representative, who could be given ample authority to act on their behalf, may

ease some of the problems. The social impacts of the project may also be multiplied by having

to deal with a community, although theoretically, these social impacts would be positive.

With regard to low-income project participants in general, their involvement in the project

may open doors to the DNA or other host country Party authorities in taking a more active role

in project approval and monitoring, under the theory that these persons require more

protection under the law, since they are not negotiating with purchasers of the tCERs or lCERs

on equal footing.

Thus, although none of the case studies indicate that the DNAs in those countries intend to

look at the terms of the contracts between project participants, they may make an exception

in the case of low-income communities and individuals.98

b. Simplified modalities and proceduresAs mentioned in subsection 3(i) of Chapter II, there will be some expectation that the simpli-

fication of modalities procedures for SSc CDM AR at the international level will be mirrored

at the national level. At the first instance, the simplification may be seen to apply only to the

procedure for obtaining DNA approval, but in the long-term, this simplification may be

expected to extend to other related permitting and regulatory procedures for the project

activity, not only as part of the simplification, but as part of the broader measures to facilitate

the implementation of these types of project activities. Although there was strong resistance

to the inclusion of language inviting Parties to promote national measures to facilitate the

implementation of these SSc CDM AR, it is highly probable that host countries will work

towards initiating such measures, recognising that simplified modalities and procedures will

not be sufficient to drive down the transaction costs for these project activities.

Considering, however, that the scope of the DNA’s review and the regulatory reach of the

host country is, at least theoretically, more limited than that of the CDM Board (focusing as it

does on the pre-validation stage), there may be less leeway for simplification of procedures,

apart from a shortening of the processing time for the DNA approval. To what extent this may

be done, without compromising a determination that the project participants possess the

necessary qualifications to be authorized to participate in the project activity, and that the

project contributes to sustainable development, will be a significant challenge. It may be more

98The latter statement is purely an informed guess as this question was not directly put to the legal consultants.

Moreover, as indicated in Part B (Glossary of A/R CDM Terms) of the Clean Development Mechanism Guidelines

for Completing the Project Design Document for A/R (CDM-AR-PDD), the Proposed New Methodology for A/R:

Baseline (CDM-AR-NMB), and the Proposed New Methodology for A/R: Monitoring (CDM-AR-NMM) under

the definition of “project participants,” “. . . the decision on the distribution of CERs from an A/R CDM project

activity shall be taken exclusively by project participants.” See Annex 19 to the report of the CDM Executive

Board at its 21st

meeting held from 28 to 30 September 2005.

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appropriate in this case to focus on facilitative measures, e.g., ensuring that in designing the

system for protecting the right to lCERs or tCERs, requirements are not overly burdensome

for low-income communities and individuals.

Another issue that the DNA will need to address is how to incorporate rules on determining

the occurrence of debundling, i.e., the fragmentation of a large project activity into smaller

parts,99 into rules for the approval of CDM A/R project activities that it will adopt, whether

simplified or not.

c. Categories of SSc CDM ARWith regard to the categories of SSc CDM AR listed in Appendix B of decision 14/CP.19 and

mentioned in subsection 3(i) of Chapter II,100 it is to be noted that all these categories involve

a transformation of the use of the land and, depending on the land use policy and classifica-

tion system in the country, may require a legal reclassification of land. The activity of

converting the land may, in addition, increase administrative costs and trigger special require-

ments under environmental impact assessment legislation. They may also require the design

of a compensation scheme to pay those who previously owned the land.

99See Appendix C, criteria for determining the occurrence of debundling. decision 14/CP.10.

100Namely, grassland to forested land, cropland to forested land, wetland to forested land, and settlement to forested

land.

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VI. Summary findings and recommendations

Having looked in detail at the various problem areas, we attempt in the following discussion

to briefly summarise our findings and, where appropriate, suggest ways forward. However,

any recommendation must be based on some general, more (macro-) economic observations

which were only partially subject of consideration by the individual country experts but which

form an essential background for policy as well as legal suggestions:

1. Contextualizing recommendations: Some observations

a. Size of the CDM AR marketAll country studies indicate that AR project activities will not be the most attractive CDM

projects in their countries, at least in the first commitment period. For example, the

Argentinean case study noted the relatively limited demand for CERs from forestry projects,

in comparison to energy projects, citing this as a consideration in determining the advisabili-

ty of legal reform. Thus, any recommendations for legislative or regulatory reform and

adjustment should take this trend into consideration and aim towards applying such reforms

and adjustments to all kinds of CDM project activities, as well as projects that go beyond the

CDM (e.g., AR projects in general or to ODA-funded AR activities).

The CDM is expected to be a driver of AR in most of the host countries studied, especially

for strengthened monitoring and enforcement of existing laws and regulations (see above). At

the same time, financial costs of the CDM are seen as a strong disincentive, especially for

small-scale initiatives. Of all the countries, Chile has the strongest tradition of afforestation

and reforestation, causing the consultant to surmise that CDM will not make a huge impact on

AR activities. Even so, all the country studies indicate that the CDM has potential in

promoting certain types of projects that would not be sufficiently boosted by existing

incentive systems, such as the reforestation of existing forestlands in the Chilean Patagonia

which were burned in the early 20th

century and which have not yet been reforested to date.

CDM may also act as a pivot for the establishment of forest plantations that are as close to the

natural state as possible and plantations based on forestry systems other than monocultures, if

the policy is well-guided by Chilean forestry authorities.

Such expectations need to be tempered by the prognosis of the CDM AR’s share of the

CDM market, as well as regional differences in attracting CDM AR projects that arise from

natural growth conditions in a region101 and the “capacity” to host CDM AR projects.102 On

the other hand, the objective situation will also have to be balanced by the political weight and

profile that CDM AR projects may have.

101For instance, trees in the Sahel (Africa) grow very slowly and are therefore expected to have very low amounts

of sequestered carbon, making them less attractive for CDM AR project development.102

This capacity is influenced by, among others, the state of forestry administration, which would include aspects of

good governance, political stability, and a secure land tenure situation.

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b. Investor involvementIn line with other projections, an OECD paper103 indicates that of the more than $800 million

earmarked for CDM expenditure to date (based on a review of 130+ CDM projects under

development), the focus is on buying emission credits rather than investing in emission-

reduction projects. While very few CDM AR project activities under development were

reviewed, this observation corresponds with trends noted in the project.

Direct investor involvement in CDM AR projects appears unlikely due, among other

things, to the complicated interplay between the laws and regulations dealing with the

environment, land and forestry, as well as any other related laws that will come into play in a

CDM AR project, all of which appear to be a disincentive to direct investment. As discussed

in detail in the country studies, there appears to be a lack of institutional and legal clarity with

regard to:

property rights and interests in the land to be used for the CDM AR project activity;

necessary permits to be obtained for implementing a larger-scale CDM AR project

activity;

preconditions for business activities of foreign individuals and entities; and

the applicability of bidding rules to public land that will be used for CDM AR.

While lack of direct involvement does not indicate that the same or similar substantive

standards will not be embodied in contracts between project participants, it does indicate

possible directions for the design of the CDM framework. For instance, it may be useful to

focus on developing substantive standards that project participants should be required to

include in the provisions of their contracts, or that would be read into such contracts, i.e.,

assumed to form part of the contract even if these standards are not mentioned, or even

developing standard clauses for inclusion in such contracts. Regulations relating to project

participants would also need to be crafted in light of recent clarifications made by the EB on

the acceptability of unilateral CDM projects104 and a perceived trend towards the prevalence

and prominence of unilateral CDM projects. Thus, foreign investment considerations may not

play a significant role at the stage of approving a CDM project activity.

103Ellis, Jane, Jan Corfee-Morlotand and Harald Winkler. “Taking Stock of Progress under the Clean Development

Mechanism (CDM)” COM/ENV/EPOC/IEA/SLT(2004)4/FINAL.104

See the definition of the term “Approval by Parties involved” found on pages 5 and 6 of Annex 14 (Revised

Guidelines for Completing the Forms CDM-PDD, CDM-NMB and CDM-NMM) of the Report of the Executive

Board of the Clean Development Mechanism at its Nineteenth Meeting (11 to 13 May 2005) and p. 6 of Annex

14 (Simplified Project Design Document for Small-Scale CDM Project Activities and its Guidelines) of the Report

of the Executive Board of the Clean Development Mechanism at is Twentieth Meeting (6 to 8 July 2005). The

penultimate paragraph of the definition states:

“The Board agreed that the registration of a CDM project activity can take place without an Annex I Partybeing involved at the stage of registration. Before an Annex I Party acquires certified emission reductions

from such a project activity from an account within the CDM Registry, it shall submit a letter of approval

to the Board in order for the CDM Registry administrator to be able to forward CERs from the CDM

Registry to the national registry of the Annex I Party” (italics supplied).

For example, the Chilean consultants expect most CDM AR projects in their country to be implemented unilater-

ally, with most of them being performed by traditional big firms planting mostly pine or eucalyptus. They will,

however, not be necessarily planting on their own land, but entering into agreements with small and medium-scale

farmers.

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VI. Summary findings and recommendations

At the practical level, a lack of direct investor involvement with CDM AR may pose an

additional challenge to the implementation of small-scale CDM AR project activities which,

more than any other type of CDM AR activities, would need up-front payments for some

costs, if they are truly implemented by low-income communities and individuals. It will thus

be necessary to consider alternative funding models to provide support to CDM AR project

developers. This is an area that the development community could explore, while it considers

the impact of the additionality rules on any role it may plan to play.

c. Differences in national standards and proceduresThe international CDM rules, as structured, allow each host country to adopt and develop its

own substantive and procedural standards. Will differences among host countries eventually

lead to a convergence towards generally accepted international principles, or will it provide

an opportunity for investors to find host countries with laws, policies and standards that are

most compatible with their interests? Even if the trend should move towards unilateral CDM

projects, cost considerations will push standards and procedures towards a certain degree of

convergence, given the pressure to have competitive projects. Our initial findings indicate

that accessibility and clarity of CDM requirements will count more than whether one

country’s standards are more stringent than another’s. Moreover, the perception of

uncertainty and unpredictability can be as strong a disincentive to direct project involvement.

Finally, if investors are more likely to be interested in buying CERs in the open market, then

laws defining the link between the project activity and CERs to be derived from them may

turn out to be much more important to the ordinary investor than the actual standards.

2. SummaryThe promotion of CDM AR projects that are environmentally sound and socially equitable

would benefit from a streamlining of CDM project activity cycle procedures by the EB. The

issue of transaction costs clearly came out as a concern in the case studies and was pointed

out as one of the major differences between AIJ and CDM projects that makes many of the

lessons learned and the benefits derived from AIJ projects inapplicable to CDM project

activities. As the discussion on additionality indicates, clearer guidance on the rules for

determining additionality, especially with regard to domestic laws and policies, would

indicate what effect these rules would have on the enactment of forestry related policies, laws

and regulations. If the issue of reduced transaction costs cannot be addressed in this

commitment period, this matter should be prioritized in the second commitment period, which

we are assuming, for the purposes of analysis, will continue to include AR project activities.

Although forestry has been an important part of developing country policies for many

years, CDM AR project activities add many new dimensions to forestry projects, dimensions

that can be most effectively tested through the use of strategic pilot projects. Policies, laws

and regulations, including those at the international level, will have to properly recognise the

value of such pioneer projects that will often have to pay the “price” of being the first to have

a go at such policies, laws and regulations. For these types of projects, government’s role may

not just be in promoting CDM involvement, but also in being an investor, especially in the

“frontier” areas identified in the case studies, as these projects may make no sense from the

purely economic viewpoint. One such area would be the promotion of forests that are as close

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to their natural state as possible. These are, however, often slow-growing and would therefore

not be automatically considered for use in a CDM AR project.

One clear message coming out of the case studies and the analysis of AIJ projects is the

benefit of strengthening public participation in CDM AR projects. While the legal requirement

for comment by local stakeholders on the CDM AR project does not necessarily require a

public hearing, any alternative to public hearing would have to give local stakeholders the

sense that their comments are being given serious consideration, the element which ultimately

makes the greater difference. Public participation should, however, be seen to extend beyond

soliciting comments on the project activity, and should encompass the different stages of the

project cycle. The extent of public participation could be considered in drawing up

sustainable development criteria. In addition, public participation should be tied not only to

particular projects, but to the CDM as a whole. Increased level of understanding of what the

CDM is and is not will enhance the overall success of CDM in a host country. The private

sector should also be seen as a crucial partner in the development of the CDM operational

framework, given that private sector investment is expected to far outstrip public sector

investment, as it has done in the area of forestry as a whole.

Since land on which CDM AR projects will be implemented may have occupants who will

not necessarily be project participants, or may provide ecosystem services to nearby groups or

communities, benefit sharing is one dimension of CDM AR projects that deserves close

attention and which appears not to be currently well regulated in host countries. Division of

CERs among different stakeholders may not be the most practical way to share benefits.

Moreover, other co-benefits are expected to arise from CDM AR projects, such as watershed

protection, biodiversity protection, and diversification of production. These benefits, if

properly valuated, could be factored into benefit-sharing schemes. Clarity of benefit-sharing

schemes will not only avoid legal difficulties but will improve the chances of project success,

thereby directly and indirectly boosting its social and environmental benefits. An evaluation

of benefit-sharing schemes for similar and related projects should form part of a government’s

activities preparatory to hosting CDM AR projects.

If CDM AR projects are to deliver on their promised benefits, small-scale project activities

that deliver real and measurable benefits to low-income communities and individuals will

have to be promoted, to the extent that they can be made economically viable. If present

conditions do not make their development economically attractive, then legal or regulatory

reform, if planned, should consider the removal of barriers to these types of project activities

as well as facilitation measures for their promotion. When in doubt, gaps in the rules on SSc

CDM AR should be interpreted in favour of consistency with the CDM’s purpose of assisting

host country Parties in achieving sustainable development.

It is clear from the foregoing chapters that more attention should be given to legal issues

surrounding CDM AR to be sure that these projects will be able to reconcile development and

climate aims. While other types of issues, e.g., financial and technical abound, the resolution

of these issues depends to a great extent on how legal issues are dealt with. Therefore, a

proper appreciation of them is essential in carrying out or hosting CDM AR project activities.

These legal issues, which have been discussed at length in this paper, can be resolved either

through the application of existing legislation if they are clear and being implemented, the use

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VI. Summary findings and recommendations

of default solutions that apply in the absence of clear legal provisions and options, or the

enactment or adjustment of new legislation. Actors involved in CDM AR must be particular-

ly aware of the default solutions that might kick in if there are no clear legal answers to issues

raised.

Based on the case studies, it cannot be concluded in general that legal reform has to take

place for CDM AR projects to be soundly implemented in host countries. The minimum

requirement is, however, to have a clear legal framework designed to meet the specific needs

of CDM AR projects. Otherwise, various legal issues are most likely to complicate and

increase costs of such projects. Clarity in a host country’s legal framework may not

necessarily entail new laws, rules and regulations; a re-examination of existing laws to see

how they would be interpreted if applied to CDM AR project activities may be sufficient as a

first step, to be coupled with steps to clearly communicate how these various laws, rules and

regulations relate to each other. Such a re-examination presumes, however, that those who are

looking at these laws have a basic appreciation of the nature of the CDM in general, and CDM

AR in particular, as it may not always be instantly obvious what the links of particular laws,

rules and regulations would be with CDM AR. If the re-examination indicates that certain

issues can only be resolved through the enactment of new legal instruments, then an

incremental approach could be taken to ensure that a host country does not take on too much

in relation to its capacity.

Another reason why legal reform does not necessarily have to take place is that in general,

it is possible to avoid most legal conflicts in the implementation of CDM AR projects by

carefully selecting sites on which to implement CDM AR project activities (e.g., choosing

land whose owner is clearly identifiable and whose title is undisputable) and by fitting AR

projects into the framework of existing forestry policies and plans, thus avoiding conflicts

with other rules of domestic law and combining CDM benefits with national sustainability and

poverty reduction goals. Such measures presume the conduct of adequate due diligence in the

process of project design and planning, taking into account issues such as those listed in Box

2 in Chapter II. If legal issues cannot be avoided through the means suggested above, then

this is an indication of a clear need for legal reform, and, at the practical level, of the fact that

very few CDM AR project activities may take place in such a country.

While CDM AR itself may not be enough of a driver for legal reform, preparations to host

CDM AR project activities, and CDM projects in general, should be used by host countries as

an opportunity to re-evaluate its policies, laws and regulations. While reform may not, and

ought not to be justified on the sole basis of CDM AR, or even CDM itself, it should at least

provide a starting point for thinking about reform of particular policies, laws and regulations.

At the very least, the examination of legal issues should identify, and hopefully influence, the

type of expertise to be made available to the DNA, and alert the government to the extent of

institutional coordination that needs to take place.

With regard to the relationship between the certification issued by the DNA and other

documents that need to be obtained by project participants from the host country before being

able to register a CDM project with the Executive Board and/or commence operations, there

are both institutional and substantive questions.

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At the institutional level, there is a need to ensure that the certification provided by the

DNA is not just another layer to the often already bureaucratic system. Given the existence of

extensive permitting systems for most CDM projects, it would be worthwhile to analyse

which regulatory or approval systems the CDM process could build on, and determine how

the certification system can be harmonized with other related systems. Of these processes, the

EIA seems to be most closely related in most instances, since often the EIA already incorpo-

rates the concept of sustainable development. It needs to be pointed out, however, that not all

CDM AR projects are required to undergo an EIA. This does not preclude authorities from

adopting elements of the EIA system that are suitable to the case of CDM AR. Moreover, if

CDM AR projects are not currently covered by a host country’s EIA system, the approval

process must include clear means by which the environmental and socio-economic impacts of

the proposed CDM AR project can be analysed or assessed, and the results communicated

clearly to stakeholders.

3. Questions for further studyIn the entire process of developing the questions for the case studies and the project as a

whole, there were several questions that were not asked, or not answered which might be

worth taking up again in another context:

No questions were devoted to the issue of bidding, which came up repeatedly in relation

to questions on concessions that could be obtained for publicly-owned land. It is therefore not

clear whether public land on which CDM AR project activities are sought to be implemented

would be exempted from bidding requirements, if applicants for rights to these land would

have otherwise been required to bid for the right to use the land. If the right to use the land

on which the CDM AR is to be implemented will be bid out, documentation on the suitability

of the bidders to be project participants could also be used for the process leading up to the

approval of voluntary participation in the CDM AR project activity. On the other hand, if the

bidding rules are waived in the case of CDM AR, the scrutiny leading up to approval of the

voluntary participation of a project participant and the certification that the project contributes

to sustainable development may be said to replace the examination that would have been

conducted in the bidding process. Exemptions would, however, raise the question of whether

the proposed CDM AR project is truly additional in relation to other alternative uses of the

land that would have required bidding. Future analysis on additionality and policies could

include such a question.

Consultants for the case studies were not required to discuss taxation issues involved in

the CDM AR projects, although the Argentinean and Philippine case studies made reference

to them in the analysis of CERs. The manner in which a host country chooses to characterize

CERs will have implications on the taxability of projects involving the generation of CERs

and their transfer. In addition, the host government may decide to impose levies on CDM AR

projects based on, among other things, the original ownership by the State of the source of the

CERs or the privilege of allowing the private entity to participate in the CDM. Nor were these

issues discussed at length in this paper, not because they were deemed to be unimportant, but

because of their highly complex nature which requires specialized competence. Further

studies on this issue need to be undertaken, since the tax consequences of CDM AR projects

will influence their actual cost and may act as an incentive or disincentive to investment in

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VI. Summary findings and recommendations

this area. Closely related to this issue is the setting of fees and other charges by the DNA that

could be influenced not only by the cost of actually administering the CDM approval process,

but also by policies to promote particular types of CDM projects.

The possibility that participation in the CDM can help host countries in meeting

commitments under other conventions was not directly raised in the case study questionnaire

and not tackled here because its discussion could potentially take the paper on a different,

although equally important, course. Multilateral Environmental Agreements (MEAs), if at all

mentioned, were referred to in very general terms rather than in relation to specific standards

or actions required under these MEAs. The Philippine and Ghanaian case studies have pointed

out, however, that this potential of a CDM AR project may be one indication that the project

contributes to sustainable development. Clearly there is a need to examine the links between

the standards in these other agreements and the CDM in a more detailed fashion, but that goes

beyond the scope of this current study. Consultations on the project have also raised the

question of how the synergistic quality of a project would reflect on a determination of addi-

tionality. On its face, it appears that the fact that an action is justifiable under other obligations

of a host country would argue against its additionality, since the project activities could have

been undertaken in relation to these other obligations. However, if it can be demonstrated that

the project activity would not have taken place in fact, then there may still be a chance that

the project activity would pass the additionality test.

4. Final wordsIronic as it may seem, despite the legal and related issues identified in the case studies and in

this paper, ultimate choices relating to policy, law and regulations will very much depend on

political factors, rather than legal reasoning. Nevertheless, such political choices can still be

guided by an awareness of the key socio-economic and environmental considerations, the

broad parameters provided by international rules, the trends in similar jurisdictions and the

legal context within each host country. In the end, it is important to find, as the Argentinean

case study says, “common sense” solutions that address the objectives of the CDM, provide

clear and tangible socio-economic and environmental benefits to public participants, and are

politically acceptable. The law is, after all, only a tool available to policy makers to achieve

policy objectives (within the framework set in most countries by the various Constitutions).

These objectives, in turn, should be clear on the basis of Article 2 of the UNFCCC (prevent

dangerous climate change), Article 12 of the Kyoto Protocol on the CDM and the general aims

of sustainable development and poverty alleviation enshrined in the Millennium Development

Goals.

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